The evolution of bidding behavior in private-values auctions and double auctions, Working Paper 2007-01

In environments with diffuse uncertainty, in which agents do not have in-formation about the others ’ types, we study bidding behavior in auctions and double auctions. Our dynamic process is based on a strong component of in-ertia but with a small probability, the bids are modified in the direction of ex-post regrets. We apply stochastic stability to identify essentially a unique bid that will be used by each type in the long run. In the first-price auction, bidding half of one’s valuation is stable. The stable bid in the k-double auc-tion is a toughening of the linear equilibrium strategy. If we add a friction in changing one’s bid, then truth-telling behavior is also obtained in both the first-price and k-double auctions. Intuitively, the stable bid minimizes the maximal regret