enterprises ; mergers ; profit ; welfare economics

Dominant strategies seldom exist in non-cooperative games. Moulin's concept of a dominance solvable game generalizes, dominant strategy without dramatic loss in appeal. We consider a class of common-value auctions characterized by the property that the maximum of a collection of informative signals is a sufficient statistic for the entire collection. We demonstrate that this class of second-price auctions is dominance solvable.

Badi H. Baltagi, Dan Levin, Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation and Advertising Reconsidered, The Review of Economics and Statistics, Vol. 68, No. 1 (Feb., 1986), pp. 148-155

Using a game-theoretic approach, we examine possible equilibrium explanations of the often-observed phenomenon that two neighboring restaurants offering similar menus nevertheless experience vastly different demands. The essential aspect of this analysis is the presence of a consumption externality that makes the popularity itself a factor in the determination of the relative attractiveness of the restaurants.

We experimentally investigate the sensitivity of bidders demanding multiple units of a homogeneous commodity to the demand reduction incentives inherent in uniform price auctions. There is substantial demand reduction in both sealed bid and ascending price clock auctions with feedback regarding rivals’ drop-out prices. Although both auctions have the same normal form representation, bidding is much closer to equilibrium in the ascending price auctions. We explore the behavioral process underlying these differences along with dynamic Vickrey auctions designed to eliminate the inefficiencies resulting from demand reduction in the uniform price auctions. Key words: multi-unit demand auctions, uniform price auction, dynamic Vickrey auction, demand reduction, experiment.

Bidding is studied in first-price common value auctions where an insider is better informed than other bidders (outsiders) about the value of the item. With inexperienced bidders, having an insider does not materially reduce the severity of the winner's curse compared to auctions with a symmetric information structure (SIS). In contrast, super-experienced bidders, who have largely overcome the winner's curse, satisfy the comparative static predictions of equilibrium bidding theory: (i) average seller's revenue is larger with an insider than in SIS auctions, (ii) insiders make substantially greater profits, conditional on winning, than outsiders, and (iii) insiders increase their bids in response to more rivals. Further, changes in insiders' bids are consistent with directional learning theory (Selten and Buchta (1994)).

We propose an axiomatic approach to study the superior performance of mechanisms with obviously dominant strategies to those with only dominant strategies. Guided by the psychological inability to reason state-by-state, we develop Obvious Preference as a weakening of Subjective Expected Utility Theory. We show that a strategy is an obviously dominant if and only if any Obvious Preference prefer it to any deviating strategy at any reachable information set. Applying the concept of Nash Equilibrium to Obvious Preference, we propose Obvious Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Nash Equilibria.

When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect by Gary Charness and Dan Levin. Published in volume 95, issue 4, pages 1300-1309 of American Economic Review, September 2005

The authors model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. The authors show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Their analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry. Copyright 1994 by American Economic Association.