Conceptual Approach to Effect of Information Asymmetry on Auction and Bidding

Abstract

This study examines the theoretical effect of information asymmetry on auction and bidding. The study indicates the significant impact of information asymmetry on the price the winner pays in an auction process. The impact varies from one form of auction to the other. In sealed-bid auction, the more informed party has a much higher marginal expected return than the uninformed competitors. The probability of loser's curse is markedly higher than the probability of winner's curse among uninformed participants that have high private value in English auction. Since bidders are more affected by information asymmetry, it is recommended that bidder should seek for information on goods of interest and also ensure that inspection is carried out on prospective purchases before the auction commences in order to reduce the negative effect of information asymmetry on bidder.