Dutch Auction and First-Price Sealed-Bid Auction
In a Dutch auction, The first bidder who calls out that he will accept the current price wins the object at that price. In the first-price sealed-bid auction, a bidder wins the auction and pays her own bid if she submits the highest bid. Therefore in both Dutch and first-price sealed-bid auctions, bidders are making tradeoffs between the probability of having the higest bid and the amount they pay if they have the highest bid.
The set of strategies available to a bidder is the same in the Dutch auction (descending auction) as in the first-price sealed-bid auction, and therefore the Bayesian Nash Equilibrium bid functions are the same. Therefore, the Dutch auction is strategically equivalent to the first-price sealed-bid auction. This is why the descending bid auction is sometimes referred to as an open first-price auction.
Cox, Roberson and Smith (1982) experimentally investigate whether the Dutch auction and the first-price sealed-bid auction are stretigically equivalant in practice. Their experimental design includes several treatments like the following:
The experiment results show that prices in first-price sealed-bid auctions are significantly higher than Dutch auction prices, which contradicts the theoretical predction that the first-price auction and the Dutch auction are strategically equivalent.
Possible Explainations for the Experimental Results
There are two possible explainations for this behavioral difference between first-price sealed-bid and Dutch auctions.
To test these two hypotheses, one can design an experiment by keeping all the parameters the same but tripling the monetary payoff. If the model of the "waiting game" is correct, then tripling the reward should reduce the price difference observed in Dutch and first-price auctions. If the model of miscalculation is correct, the price gap between the two auction systems will be maintained. The subsequent experiments by Cox, Smith and Walker (1983) show that there is no significant difference in auction prices from tripling the monetary payoff. Therefore, the model of miscalculation is supported.
Lucking-Reily(1999) examines whether the Dutch auction and first-price sealed-bid auction are strategically equivalent. His experimental design included the following:
The experiment results show that prices in the first-price sealed-bid auction are significantly lower than Dutch auction prices, which contradicts the theoretical prediction that the first-price auction and the Dutch auction are strategically equivalent.
Possible resolution of the Inconsistent Results
The key to resolving this apparent inconsistency in results seems to be the variation in speed of the Dutch clock and a theory involving impatient bidders. Kwasnica and Katok (2003) found that variations in the speed of the Dutch clock significantly change the auctioneer's revenue in these two auction formats. While fast Dutch auction clock speeds generated revenues that were significantly below that in the sealed-bid auctions (similar to Cox et.al), a slower clock generated significantly more revenues than the sealed bid auctions (consistent with Lucking-Reily 1999).