The Declining Price Anomaly

Preston R. McAfee and Daniel R. Vincent , Journal of Economic Theory 60(1) , 191-212 , June 1993.

Data from wine auctions indicate that identical products sold sequentially typically follow a decreasing pattern of prices, known as the declining price anomaly. This is explained, for both first and second price auctions, by appealing to risk averse bidders. Earlier bids are then equal to expected later prices plus a risk premium associated with the risky future price. We show that this logic rests on the assumption of nondecreasing absolute risk aversion, which is necessary for pure strategy equilibrium bidding functions to exist. Thus, decreasing absolute risk aversion implies ex post inefficiency with positive probability. Data from wine auctions are used to confirm the existence of the declining price anomaly.

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