Ettinger, D.; (2003) Bidding among friends and enemies. (ELSE Working Papers 67). ESRC Centre for Economic Learning and Social Evolution: London, UK.

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Abstract

We consider an auction setting in which bidders, even if they fail to obtain the good, care about the price paid by the winner. We study the impact of these price externalities on the first-price auction and the second-price auction in a symmetric information framework. We establish a distinction between price externalities that do not depend on the identity of the winner and price externalities that depend on the identity of the winner. We prove that the outcome of the first-price auction is not affected by the first type of price externalities while the outcome of the second-price auction is. In contrast, the second type of price externalities affects the outcome of both auction formats. In any case, in comparison with the first-price auction, the second-price auction exacerbates the effects of price externalities whatever their types are. The two auction formats are generically not equivalent.

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