Opportunity Cost, Inattention and the Bidder's Curse

Authors

David J. Freeman, Simon Fraser University
Erik O. Kimbrough, Chapman UniversityFollow
J. Philipp Reiss, Institute of Economics Section Industrial Organization Blücherstrasse, Germany

Document Type

Article

Publication Date

7-28-2020

Abstract

Auction winners sometimes suffer a “bidder’s curse”, paying more for an item at auction than the fixed price charged for an identical item by other sellers. This seemingly irrational behavior is puzzling because the information necessary to avoid overpaying would appear to be readily available to bidders, yet they seem to ignore it. To understand this behavior, we consider the bidders’ decisions whether to acquire information about the fixed price before bidding, in the presence of opportunity costs. Our theory introduces costly information acquisition into an auction model, with a fixed price aftermarket selling an identical good. When information about the fixed price is costly, bidders sometimes remain rationally ignorant and overbid in the auction, generating the bidder’s curse. To assess the empirical validity of our proposed explanation, we study the model’s predictions in an experiment where subjects have an opportunity cost of looking up a fixed price and bid in an auction. We find that information acquisition decreases and overbidding increases with opportunity cost as predicted. Most observed lookup behavior is rationalizable and rational ignorance reliably generates the bidder’s curse.

Comments

NOTICE: this is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review, volume 129, in 2020. https://doi.org/10.1016/j.euroecorev.2020.103543

The Creative Commons license below applies only to this version of the article.

Recommended Citation

Freeman, D. J., Kimbrough, E. O., & Reiss, J. P. (2020). Opportunity cost, inattention and the bidder’s curse. European Economic Review, 129, 103543. https://doi.org/10.1016/j.euroecorev.2020.103543

Peer Reviewed

1

Copyright

Elsevier

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.