Hybrid Auctions II: Experimental Evidence

Abstract

In this paper we report the results of an experiment designed to examine the properties of a hybrid auction - a Dutch-Vickrey auction, that combines a sealed bid first-price auction with a sealed bid second-price auction. This auction mechanism shares some important features with that used in the sale of the companies constituted through the partial division of the Telebras System - the government-owned Telecom holding in Brazil. We designed an experiment where individuals participate in a sequence of independent first-price auctions followed by a sequence of hybrid auctions. Several conclusions emerged from this experimental study. First, ex-post efficiency was achieved overwhelmingly by the hybrid auctions. Secondly, although overbidding (with respect to the risk-neutral Bayesian Nash equilibrium) was a regular feature of participants’ bidding behavior in the first-price auctions — as it is commonly reported in most experimental studies of first-price auctions, it was less frequent in the hybrid auctions. By calibrating the results to allow for risk-averse behavior we were able to account for a significant part of the overbidding. Finally, we compared the revenue generated by the hybrid auction with that generated by a standard first-price sealed bid auction and the results were ambiguous.