An Experimental Study of Auctions with Externalities

This paper theoretically and experimentally studies first-price and second-priceauctions in a complete information setting where one bidder creates a positiveor negative externality on the other two bidders. The two bidders subject toexternalities can be considered as playing coordination and anti-coordinationgames under positive and negative externalities, respectively, and the issuesof coordination failure and free riding arise. Our experimental data show thatcoordination failure occurs more frequently than free riding, which suggeststhat participants react more sensitively to negative externalities than to positiveones. Moreover, the existence of inefficient equilibria increases coordinationfailure and reduces free riding.