Dutch Auction and FirstPrice SealedBid AuctionTheoretical PredictionIn a Dutch auction, The first bidder who calls out that he will accept the current price wins the object at that price. In the firstprice sealedbid auction, a bidder wins the auction and pays her own bid if she submits the highest bid. Therefore in both Dutch and firstprice sealedbid 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 firstprice sealedbid auction, and therefore the Bayesian Nash Equilibrium bid functions are the same. Therefore, the Dutch auction is strategically equivalent to the firstprice sealedbid auction. This is why the descending bid auction is sometimes referred to as an open firstprice auction. Experimental DesignCox, Roberson and Smith (1982) experimentally investigate whether the Dutch auction and the firstprice sealedbid auction are stretigically equivalant in practice. Their experimental design includes several treatments like the following:
Experimental ResultsThe experiment results show that prices in firstprice sealedbid auctions are significantly higher than Dutch auction prices, which contradicts the theoretical predction that the firstprice auction and the Dutch auction are strategically equivalent. Possible Explainations for the Experimental ResultsThere are two possible explainations for this behavioral difference between firstprice sealedbid 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 firstprice 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. Experimental DesignLuckingReily(1999) examines whether the Dutch auction and firstprice sealedbid auction are strategically equivalent. His experimental design included the following:
Experimental ResultsThe experiment results show that prices in the firstprice sealedbid auction are significantly lower than Dutch auction prices, which contradicts the theoretical prediction that the firstprice auction and the Dutch auction are strategically equivalent. Possible resolution of the Inconsistent ResultsThe 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 sealedbid auctions (similar to Cox et.al), a slower clock generated significantly more revenues than the sealed bid auctions (consistent with LuckingReily 1999). References
 
