A Naïve Bidder in a Common Value Auction

Abstract

We study a common value auction in which two bidders compete for an item the value of which is a function of three independent characteristics. Each bidder observes one of these characteristics, but one of them is 'naive' in the sense that he does not realize the other bidder's signal contains useful information about the item's value. Therefore, this bidder bids as if this were an Independent Private Values auction. We show that the naive's bidder payoff exceeds that of his fully rational opponent for all symmetric unimodal signal distributions. We also show that naive bidding is persistent in the evolutionary sense.