Herding and the Winner's Curse in Markets with Sequential Bids

Abstract

We present a model of social learning in an environment with common values where informational cascades and herding arise in combination with the winner's curse. A seller of an object sequentially obtains bids from potential buyers. We characterize three classes of equilibria that differ widely in their information aggregation properties and in the size of the rent the seller captures from the buyers. We compare the procedure of sequentially soliciting bids from the buyers to conducting an English auction for the object in terms of maximization of seller's revenue and demonstrate the superiority of the former.Journal of Economic LiteratureClassification Numbers: D82, D83. © 1999 Academic Press.