Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

Abstract

The experimental literature has documented that there is overbidding in second-price auctions, regardless of the valuations of bidders. In contrast, in first-price auctions, there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be rationalized by a simple extension of the standard auction model, where bidders anticipate (constant) positive or negative emotions caused by the mere fact of winning or losing. Even if the emotional (dis-)utilities are very small, the revenue-maximizing reserve price might be significantly different from the standard model. Moreover, decreases with the number of bidders. © The editors of The Scandinavian Journal of Economics 2012.