Bidding with Outside Options

Abstract

We introduce and experimentally test an auction model that allows for outside options of bidders as substitutes for the auctioned object under the private values assumption. Theoretically and in the experiments, bidders respond to their individual outside options and to variations of common knowledge about competitors' outside options. Interestingly, private outside options induce concave equilibrium bidding functions with uniformly distributed valuations. The bidding data does support this property. As theoretically predicted, lower-valued outside options lead individuals to bid more aggressively in the experiments.