TY - JOUR

T1 - Ascending bid auctions with behaviorally consistent bidders

AU - Karni, Edi

AU - Safra, Zvi

PY - 1989/12

Y1 - 1989/12

N2 - Decision makers whose preferences do not satisfy the independence axiom of expected utility theory, when faced with sequential decisions will act in a dynamically inconsistent manner. In order to avoid this inconsistency and maintain nonexpected utility, we suggest the idea of behavioral consistency. We implement this notion by regarding the same decision maker at different decision nodes as different agents, and then taking the Bayesian - Nash equilibrium of this game. This idea is applied to a finite ascending bid auction game. We show the condition for the existence of an equilibrium of this game, and we also characterize the equilibrium in those cases when it exists. In particular, when the utility functionals are both quasi-concave and quasi-convex, then there is an equilibrium in dominant strategies where each bidder continues to bid if and only if the prevailing price is smaller than his value. In the case of quasi-concavity it is shown that, in equilibrium, each bidder has a value such that he continues with positive probability up to it, and withdraws after that.

AB - Decision makers whose preferences do not satisfy the independence axiom of expected utility theory, when faced with sequential decisions will act in a dynamically inconsistent manner. In order to avoid this inconsistency and maintain nonexpected utility, we suggest the idea of behavioral consistency. We implement this notion by regarding the same decision maker at different decision nodes as different agents, and then taking the Bayesian - Nash equilibrium of this game. This idea is applied to a finite ascending bid auction game. We show the condition for the existence of an equilibrium of this game, and we also characterize the equilibrium in those cases when it exists. In particular, when the utility functionals are both quasi-concave and quasi-convex, then there is an equilibrium in dominant strategies where each bidder continues to bid if and only if the prevailing price is smaller than his value. In the case of quasi-concavity it is shown that, in equilibrium, each bidder has a value such that he continues with positive probability up to it, and withdraws after that.

UR - http://www.scopus.com/inward/record.url?scp=0000544211&partnerID=8YFLogxK

U2 - 10.1007/BF02283533

DO - 10.1007/BF02283533

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AN - SCOPUS:0000544211

SN - 0254-5330

VL - 19

SP - 435

EP - 446

JO - Annals of Operations Research

JF - Annals of Operations Research

IS - 1

ER -