English Auctions with toeholds: An experimental study

We run experiments on English Auctions where the bidders already own a part (toehold) ofthe good for sale. The theory predicts a very strong effect of even small toeholds, however wefind the effects are not so strong in the lab. We explain this by analyzing the flatness of thepayoff functions, which leads to relatively costless deviations from the equilibrium strategies.We find that a levels of reasoning model explains the results better than the Nash equilibrium.Moreover, we find that although big toeholds can be effective, the cost to acquire them mightbe higher than the strategic benefit they bring. Finally our results show that in general theseller s revenues fall when the playing field is uneven.