Econometrica: Jan 2005, Volume 73, Issue 1

The Affiliation Effect in First‐Price Auctions

https://doi.org/10.1111/j.1468-0262.2005.00571.x
p. 263-277

Joris Pinkse, Guofu Tan

We study the monotonicity of the equilibrium bid with respect to the number of bidders in affiliated private‐value models of first‐price sealed‐bid auctions and prove the existence of a large class of such models in which the equilibrium bid function is not increasing in . We moreover decompose the effect of a change in on the bid level into a competition effect and an . The latter suggests to the winner of the auction that competition is less intense than she had thought before the auction. Since the affiliation effect can occur in both private‐ and common‐value models, a negative relationship between the bid level and does not allow one to distinguish between the two models and is also not necessarily (only) due to bidders taking account of the winner's curse.

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Supplemental Material

The Affiliation Effect in First-Price Auctions: Supplementary Material

In Pinkse and Tan (2005) we show the existence of a new effect called the affiliation effect, which can cause equilibrium bids to be decreasing in the number of bidders in first-price auctions with conditionally independent private values. Here we analyze what happens when the number of bidders tends to infinity. We also derive sufficient conditions for the expected winning bid to be increasing in the number of bidders. We further generalize some of the results in Pinkse and Tan (2005) to general affiliated private-values models.

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