Heterogeneous bids in auctions with rational and boundedly rational bidders: theory and experiment

We present results from a series of experiments that allow us to measure overbidding and, in particular, underbidding in first-price auctions. We investigate the extent to which the amount of underbidding depends on the seemingly innocuous parameters of the experimental setup. To structure our data, we present and test a theory that introduces constant markdown bidders into a population of fully rational bidders. While a fraction of bidders in the experiment can be described by Bayesian Nash equilibrium bids, a larger fraction seems either to use constant markdown bids or to rationally optimise against a population with fully rational and boundedly rational markdown bidders.