Accounting for Cognitive Costs in On-Line Auction Design

Abstract

Many auction mechanisms, including first and second price ascending and sealed bid auctions, have been proposed and analyzed in the economics literature. We compare the usefulness of different mechanisms for on-line auctions, focusing on the cognitive costs placed on users (e.g. the cost of determining the value of a good), the possibilities for agent mediation, and the trust properties of the auction. Different auction formats prove to be attractive for agent mediated on-line auctions than for traditional off-line auctions. For example, second price sealed bid auctions are attractive in traditional auctions because they avoid the communication cost of multiple bids in first price ascending auctions, and the “gaming” required to estimate the second highest bid in first price sealed bid auctions. However, when bidding agents are cheap, communication costs cease to be important, and a progressive auction mechanism is preferred over a closed bid auction mechanism, since users with semi-autonomous agents can avoid the cognitive cost of placing an accurate value on a good. As another example, when an on-line auction is being conducted by an untrusted auctioneer (e.g. the auctioneer is selling its own items), rational participants will build bidding agents that transform second price auctions into first price auctions.