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American Economic Review: Vol. 101 No. 2 (April 2011)

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The Bidder's Curse

Article Citation

Malmendier, Ulrike, and Young Han Lee. 2011. "The Bidder's Curse." American Economic Review, 101(2): 749-87.

DOI: 10.1257/aer.101.2.749

Abstract

We employ a novel approach to identify overbidding in auctions. We compare online auction prices to fixed prices for the same item on the same webpage. In detailed data on auctions of a board game, 42 percent of auctions exceed the simultaneous fixed price. The result replicates in a broad cross-section of auctions (48 percent overbidding). A small fraction of overbidders, 17 percent of bidders, suffices to generate the large fraction of auctions with overbidding. We show that the observed behavior is inconsistent with rational behavior, even allowing for uncertainty about prices and switching costs, since the expected auction price also exceeds the fixed price. Limited attention best explains our results. (JEL D12, D44)

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Authors

Malmendier, Ulrike (U CA, Berkeley)
Lee, Young Han (Virtu Financial LLC, New York, NY)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D44: Auctions


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