Economics Research Seminar

"An Equilibrium Model of the First-Price Auction with Strategic Uncertainty: Theory and Empirics"

In many first-price auctions, bidders face considerable strategic uncertainty: they cannot perfectly anticipate the other bidders’ bidding behavior. We propose a model in which bidders do not know the entire distribution of opponent bids but only the expected winning bid and lower and upper bounds on the opponents’ bids. We characterize the optimal bidding strategies and prove the existence of a novel equilibrium. Finally, we apply the model to estimate the cost distribution in highway procurement auctions. Our model fits the data better than existing approaches in which the entire distribution of opponent bidders’ bids is assumed to be known.