Outside options: another reason to choose the first-price auction

Abstract

In this paper we study equilibrium and experimental bidding behaviour in first-price and second-price auctions with outside options.

We find that bidders do respond to outside options and to variations of common knowledge about competitors’ outside options. However, overbidding in first-price auctions is significantly higher with outside options than without. First-price auctions yield more revenue than second-price auctions. This revenue-premium is significantly higher with outside options. In second-price auctions the introduction of outside options has only a small effect.