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Auction for Prominence and Consumer Search: Theory and Experiment

Abstract: We develop a parsimonious model of search prominence and test its predictions in a controlled laboratory experiment varying the strength of the search friction. Two sellers bid in a second-price auction for a prominent position that gives the winner a search-cost advantage. Sellers then post prices simultaneously. Observing the two prices and the top seller's match value for free, the buyer decides whether to pay a sunk cost to inspect the second seller's match value. The experiment confirms the theory's central prediction: the top seller prices higher than the second seller, and this gap widens as prominence grows, indicating that prominence confers market power. However, behavior departs from theory in several ways. Prices are more dispersed than predicted, compressing the price gap and reshaping how buyers search. Under strong prominence, this price-induced search keeps buyers loyal to the top seller and lifts its profit above the competitive benchmark. Under weak prominence, sellers overbid so severely for the position that their profits fall below the predicted level. While buyers over- and under-search, their behavior remains close to optimal on average, allowing them to capture more surplus than predicted. These welfare anomalies stem mainly from the distorted prices that prominence induces, rather than from noisy search alone.

Revisiting the Intra-Team Communication Method to Elicit Level-k Reasoning in Beauty Contests and 11–20 Games

with Istiak Ahmed, Patarasate Unjitwattana, Emily Yunxi Xie, Meng-Jhang Fong, and Po-Hsuan Lin

First author. Revising at European Economic Review.

Abstract: How level-0 players behave and how they are perceived by higher-level players are central questions in the literature on level-k models of boundedly rational strategic reasoning. To study these twin questions, we apply the intra-team communication method developed by Burchardi and Penczynski (2014) to identify level-0 actions and beliefs in the canonical beauty contest game and in a variant of the 11–20 game of Goeree et al. (2018), in which behavior appears inconsistent with the standard level-k model. In the beauty contest game, we replicate Burchardi and Penczynski (2014)'s finding that elicited level-0 beliefs align with observed level-0 actions. In the variant of the 11–20 game, however, elicited level-0 beliefs and observed level-0 actions diverge, and both depart from the standard level-0 assumption, suggesting a complementary explanation for the behavioral pattern documented by Goeree et al. (2018).

Coordination under Uncertainty and Noisy Communication: A Generalized Email Game

Abstract: Which information transmission protocols improve coordination under uncertainty and noisy communication? Theory is indeterminate between an inefficient "tacit" equilibrium, where information is ignored, and an efficient "vocal" equilibrium, where players act on it. We test this in a laboratory experiment based on a generalized e-mail game, exogenously varying the message-generation rule across three protocols. Vocal behavior rises with the incentive to take the risky action, and relative to an automatic protocol, voluntary messaging significantly improves coordination. However, a sunk cost to sending reduces vocality by inducing senders to opt out. These patterns suggest that voluntariness credibly signals players’ intent to coordinate via forward induction, and that the value of cost-free signaling for equilibrium selection hinges on the alignment of interests.