Credibility in Second-Price Auctions: An Experimental Test

Abstract

We provide the first direct test of how the credibility of an auction format affects bidding behavior and final outcomes. To do so, we conduct a series of laboratory experiments where the role of the seller is played by a human subject who receives the revenue from the auction and who (depending on the treatment) has agency to determine the outcome of the auction. We find that a large majority of bids in the non-credible version of the second-price auction lie between the theoretical benchmarks of the first-price auction and the credible second-price auction. While sellers in the non-credible second-price auction often break the rules of the auction and overcharge the winning bidder, they typically do not maximize revenue. We provide a behavioral explanation for our results based on incorrect beliefs (on the part of bidders) and aversion to rule-breaking (on the part of sellers), which is confirmed by revealed preference tests.