English Auctions with Toeholds: An Experimental Study

Abstract

We run experiments on English Auctions where the bidders already own a part (toehold) of the good for sale. The theory predicts a very strong effect of even small toeholds, however we find the effects are not so strong in the lab. We explain this by analyzing the flatness of the payoff functions, which leads to relatively costless deviations from the equilibrium strategies. We find that a levels of reasoning model explains the results better than the Nash equilibrium. Moreover, we find that although big toeholds can be effective, the cost to acquire them might be higher than the strategic benefit they bring. Finally our results show that in general the seller's revenues fall when the playing field is uneven.