All-Pay Auction

http://freakonomics.blogs.nytimes.com/2008/12/16/an-all-pay-auction/#more-3523

I know we've done a few auctions in class and this is something that I'm hoping Jason and Nicole don't ever offer up. Although we've already done a few pay-to-play scenarios, this guy is a different animal. All pay auctions mean that even if you don't win the auction, you have to pay some price. The author gives two examples, one being an auction for $20 in which the winner and runner-up have to pay their bids and the other being swoopo.com where you pay to bid for an item. The bidding gets to a point where a small number bidders are left and none of them want to lose what they've already put into the auction. It's an interesting experiment in how people can view sunk costs as "investments."
Economic theory proclaims that sunk costs should never factor into future decisions. What's done is done and there is no taking that back. Thus the strategy for the teacher's game would be to pay up to the value that you give to a $20-bill. So rather than having to fork over the average $30 that results from this game if you lose, you only give up $20.

So here is something that has always confused me. I know sunk costs are sunk. But is this something that people always obey, or is this rule just generally not followed. What I mean by this, is do people enter the auction with a willingness to pay equal to that amount required to win, or do people enter the auction with a willingness to pay the same as if they were to just buy the item off a shelf. Perhaps it is some combination of the two? However, if people enter with the mindset that they must win, then they are obeying the law because their willingness to pay was already as high, but if people exceed their original willingness to pay then they are violating the rule. But if they are exceeding their willingness to pay, why are they bidding?! Is it a law, or is it a rational?