An Experimental Study of Auctions with Externalities

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