The Effect of Framing in Sealed-Bid Auctions: Theory and Experiments

Yutaka Kayaba, Jun Maekawa and Hitoshi Matsushima
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Yutaka Kayaba: Department of Economics, University of Tokyo
Jun Maekawa: Department of Economics, Osaka University of Economics and Law
Hitoshi Matsushima: Department of Economics, University of Tokyo

No CARF-F-567, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We investigate strategic games with imperfect information, such as sealed-bid auctions, wherein players are not good at hypothetical thinking and are therefore unable to select even dominant strategies unless devices to guide them are put in place. We propose a measure to encourage such bounded-rational players to engage in hypothetical thinking. We consider a frame as a multi-stage game format with imperfect information within a range consistent with an inherent strategic game. We showed that a well-specified frame has a significant effect on the promotion of hypothetical thinking. By comparing the second-price auction as a non-frame format and the ascending proxy auctions as framed formats, we theoretically demonstrate that framing can eliminate overbidding and encourage bidders to act more sincerely. These theoretical findings were confirmed by both online and laboratory experimental results.

Pages: 66
Date: 2023-08
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