Asymmetric Cost Pass-Through in Multi-Unit Procurement Auctions: An Experimental Approach*

We explore input cost pass-through in multi-unit procurement auctions. Whether cost shocks are private versus common across firms has important implications for discriminatory, but not uniform price auctions. We provide evidence of asymmetric pass-through of private cost shocks in discriminatory auctions. Unlike uniform price auctions, revenue-maximizing bidders in discriminatory auctions ‘pad’ bids close to the expected clearing price for units with costs below that price, but they do not bid below cost on higher cost units. Therefore, if costs are higher than expected, the clearing price rises and if costs are lower than expected, the clearing price remains high.     

Fighting collusion in auctions: An experimental investigation

The danger of collusion presents a serious challenge for auctioneers. In this paper, we compare the collusive properties of two standard auctions, the English auction and the first-price sealed-bid auction, and a lesser-known format, the Amsterdam (second-price) auction. In the Amsterdam auction, the highest losing bidder earns a premium for stirring up the price. We study two settings: in one, all bidders can collude, and in another, only a subset is eligible. The experiments show that the Amsterdam auction triggers less collusion than the standard auctions. We compare experimental results to theoretical predictions, and provide an explanation where they differ.     

Entry into auctions: An experimental analysis

This paper investigates entry decisions into first and second-price auctions using an experimental design to extract information on willingness-to-pay to enter (WTE). We find that subjects tend to overpay to enter both auction formats. In particular, if the subjects believe they will be bidding against bidders following the risk-neutral Nash strategy, their WTE is greater than the optimal risk-neutral amount 97% of the time for first-price auctions (FPA) and 90% for second-price auctions (SPA). If they believe that they are bidding against subjects who bid as do the other subjects, they submit a WTE that is too high 92% of the time for FPA and 69% of the time for SPA. We also find, in line with previous studies, significant overbidding in both the FPA and SPA. We then investigate whether introducing risk aversion (RA) or “joy of winning” (JOY) can explain the joint observation of over-entry and overbidding. In particular, using bid data alone, we structurally estimate three models, one allowing RA only, one allowing for JOY only and one allowing for both RA and JOY. While a model with JOY alone overestimates WTE, we find that RA alone can explain 38% of WTE but a model with both RA and JOY (where RA is estimated using FPA bids, and JOY is estimated using SPA bids) can explain 65% of WTE. Moreover, JOY appears to explain nearly all of the male WTE but only 44% of the female WTE.     

Supply function equilibria with capacity constraints and pivotal suppliers

The concept of a supply function equilibrium (SFE) has been widely used to model generators' bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm's rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not fully considered the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform-price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform-price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.     

Single Bidders and Tacit Collusion in Highway Procurement Auctions

Collusion in auctions can take different forms, such as refraining from bidding. Certain aspects of highway procurement auctions facilitate collusive outcomes. We collect data on asphalt paving auctions conducted in Kentucky from 2005-2007. We determine the potential service area of each asphalt plant and potential bidders for each paving project. We analyze firms’ bid participation decisions, including variables affecting costs as well as competitive and strategic effects. In many geographic markets where firms face only a few identifiable rivals, county boundaries serve as a coordinating mechanism for softening competition, significantly influencing firms’ decisions whether and how much to bid.     

Entry and Bidding in Common and Private Value Auctions with an Unknown Number of Rivals

In many procurement auctions bidders do not know how many rivals they face at the time that they incur the cost of preparing their bids. We show in a theoretical model that regardless of whether the procurement is characterized by private or by common values an increase in the potential number of bidders may lead to higher procurement costs. This raises potential policy questions of whether and how entry should be encouraged or limited in public procurement auctions. We use evidence from auctions of construction contracts to estimate the effect of an increase in the pool of potential bidders on entry and auction prices when entry and bidding decisions are made sequentially with no knowledge of the number or identity of the actual competitors.     

Efficiency in Second-Price Auctions: A New Look at Old Data

Experiments on second-price sealed-bid private value auctions have established that subjects typically bid more than their value, despite the fact that value bidding is a dominant strategy in such auctions. Moreover, the laboratory evidence shows that subjects do not learn to bid their values as they gain more experience. In the present paper, we re-examine the second-price auction data from Kagel and Levin’s (Econ J 103:868–879, 1993) classic paper. We find that auction efficiency increases over time, even though the frequency of overbidding is unchanged. We argue that the rise in efficiency is due to a decline in the variability of overbidding. This is consistent with subjects’ learning to bid more like each other.     

Optimal reserve prices in sealed-bid auctions with reference effects

The reference effect and loss aversion are incorporated into the buyer’s utility in the symmetric independent private value models of sealed-bid auctions. The buyer’s equilibrium bidding strategy and the seller’s optimal reserve price are derived for the first-price and second-price sealed-bid auctions. In both auction mechanisms, the seller’s optimal reserve price and expected revenue are increasing in the reference point. We compare the seller’s expected revenues as well as the optimal reserve prices in the two auctions. The results show that the seller will set a higher optimal reserve price but obtain lower optimal expected revenue in the second-price auction compared to the first-price auction. Further, we extend the model to the gain-seeking case, and endogenize the reference point as the ex-ante expected price of the item in equilibrium. In contrast to the loss-averse case, the seller will set a lower optimal reserve price but obtain higher optimal expected revenue in the second-price auction compared to the first-price auction if the buyers are gain-seeking. With an endogenous reference point, similar results are obtained in terms of revenue comparison between the two auctions.     

Spectrum auction design: Simple auctions for complex sales

Following the successful PCS Auction conducted by the US Federal Communications Commission in 1994, auctions have replaced traditional ways of allocating valuable radio spectrum. Spectrum auctions have raised hundreds of billion dollars worldwide and have become a role model for market-based approaches in the public and private sectors. The PCS spectrum was sold via a simultaneous multi-round auction, which forces bidders to compete for licenses individually even though they typically value certain combinations. This exposes bidders to risk when they bid aggressively for a desired combination but end up winning an inferior subset. Foreseeing this possibility, bidders may act cautiously with adverse effects for revenue and efficiency. Combinatorial auctions allow for bids on combinations of licenses and thus hold the promise of improved performance. Recently, a number of countries worldwide have switched to the combinatorial clock auction to sell spectrum. This two-stage auction uses a core-selecting payment rule. The number of possible packages a bidder can submit grows exponentially with the number of licenses, which adds complexity to the auction. For larger auctions with dozens of licenses bidders cannot be expected to reveal all their valuations during such an auction. We analyze the impact of two main design choices on efficiency and revenue: simple “compact” bid languages versus complex “fully expressive” bid languages and simple “pay-as-bid” payment rules versus complex “core-selecting” payment rules. We consider these design choices both for ascending and sealed-bid formats. We find that simplicity of the bid language has a substantial positive impact on the auction?s efficiency and simplicity of the payment rule has as a substantial positive impact on the auction?s revenue. The currently popular combinatorial clock auction, which uses a complex bid language and payment rule, achieves the lowest efficiency and revenue among all treatment combinations.     

Sorry Winners

Bidders who receive both “common-value” and “private-value” signals about the value of an auction prize cannot fully infer their opponents’ information from the bidding. So bidders may overestimate the value of the prize and, subsequently, regret winning. When multiple objects are on sale, bidding in an auction provides information relevant to the other auctions, and sequential auctions are more vulnerable to overpayment and winners’ regret than are simultaneous auctions. With information inequality among bidders, the seller’s revenue is influenced by two contrasting effects. On the one hand, simultaneous auctions reduce the winner’s curse of less informed bidders and allow them to bid more aggressively. On the other hand, sequential auctions induce less informed bidders to bid more aggressively in early auctions to acquire information.      

Securities auctions with pre-project information management

This paper analyzes securities auctions in which bidders have an option to acquire information after winning the right to develop a project. The payment consists of an up-front cash bid and a contingent security bid, which distorts investment and information acquisition relative to the first-best. We order securities in terms of their steepness: the payment of a steeper security is more sensitive to high project values. The agent’s incentives to acquire information that prevents either cost overruns (Type I errors) or false cancellations (Type II errors) decrease with the steepness of securities. The optimal limited-liability securities auction involves bidding debt that minimizes the distortions in the agent’s incentives to acquire performance-enhancing information. The model delivers implications on the practices commonly observed in oil lease auctions.     

Construction Procurement Auctions: Do Entrant Bidders Employ More Aggressive Strategies than Incumbent Bidders?

Asymmetric auction theory predicts that weak bidders will bid more aggressively when facing strong bidders, while strong bidders will bid less aggressively when facing weak bidders. This paper finds empirical evidence to support this hypothesis regarding the behavior of weak bidders in construction auctions. Examining a comprehensive data set of more than 7,500 Utah construction procurement auctions, we find that entrants bid more aggressively than do incumbents for most subcontractor types. Reflecting their inexperience and uncertainty regarding the true cost of projects, entrants’ bids are found to be more widely dispersed around the central tendency of bids.     

Resident Bid Preference,Affiliation, and Procurement Competition: Evidence from New Mexico

In public procurement auctions, governments routinely offer preferences to qualified firms in the form of bid discounts. Previous studies on bid discounting do not account for affiliation – a form of cost dependence between bidders that is likely to occur in a public procurement environment. Utilizing data from the New Mexico Department of Transportation’s Resident Preference Program, I develop and estimate an empirical model of firm bidding and entry that allows for affiliation in firms’ project costs. I find evidence of affiliation and show how it changes preference auction outcomes.     

Competition in a Dynamic Auction Market: Identification,Structural Estimation,and Market Efficiency

The model incorporates an infinite series of auctions for identical items (or close substitutes) ordered over time and bidders with unit demand. The participants of each auction are drawn from a dynamic pool, with losing bidders remaining in the pool of potential bidders. The number of bidders in each auction is unobservable. Risk‐neutral, forward‐looking bidders submit bids below valuation. A novel identification and estimation strategy is used to estimate the valuation distribution from an order statistic of the bids. The model is used to evaluate the efficiency of online auctions for a 60GB Apple iPod Video, compared to a perfect‐competition benchmark.     

Optimal sequential auctions

Sequential sealed first-price and open descending-price procurement auctions are studied. We examine which procurement auction rule achieves the low procurement cost. We show that the answer to this policy question depends on whether the items are complements or substitutes. With substitutes, the first-price procurement auction is preferred, while with complements, the open descending-price procurement auction is preferred. We also illustrate the procurement cost minimizing auction and the auction rule preferred by the bidders. With substitutes, bidders prefer the open descending-price procurement auction, while with complements bidders prefer the first-price procurement auction.     

On Strategic Quantity Bidding in Multiple Unit Auctions

Standard studies of multiple unit auctions generally overlook the strategic role of bidders' quantity decisions. Using a simple equilibrium model of bidding I analyze bidders' incentives to choose quantities in discriminatory and competitive auctions. The main result is that bidders have a stronger strategic incentive to bid for fewer units in competitive auctions. Since under competition a bidder pays the lowest accepted price for each unit she gets, she may benefit from dropping her quantity to let lower-valuing bidders enter the set of winners. This prediction is consistent with empirical observations from foreign currency and spectrum auctions.     

Auction Reforms for Effective Official Development Assistance

Auctions, which are applicable to aid-related procurement systems, have been recently recognized as an important tool for improving economic efficiency. Using data on procurement auctions for Japanese official development assistance projects, the equilibrium bid function is estimated. The data reveals that a 1% increase in the number of bidders decreases the equilibrium bid by about 0.2%. This implies that strengthening competition at procurement auctions lowers contract prices and mitigates the heavy indebtedness of developing countries. Auctions are also instrumental in fostering local business environment and governance. For intensifying bidding competition, it is useful to introduce an electronic bidding system, encourage local firms to jointly bid, and relax excessive qualification requirements.     

Failed takeover attempts,corporate governance and refocusing

Hostile takeover attempts oftentimes signal that a target firm has an over‐diversified and ineffective corporate strategy. What does this signal mean when takeover attempts fail? Drawing from agency theory, we argue that target firms managed by independent directory boards are likely to ignore the takeover attempt and not refocus their firms' strategy. Conversely, target firms managed by nonindependent boards are more likely to view the failed takeover attempt as a ‘wake‐up call’ and will refocus their firms' strategy so as to preserve the firm's survival. These arguments are tested using a sample of 76 firms that were targets of failed hostile takeover attempts. Logistic regression analyses confirm the predictions. This study suggests that in the aftermath of a failed takeover attempt board of director characteristics can help predict changes in corporate strategies. Copyright © 2002 John Wiley & Sons, Ltd.     

A Dynamic Model of Auctions with Buy‐It‐Now: Theory and Evidence

In the ascending‐price auctions with Yahoo!‐type buy‐it‐now (BIN), we characterize and derive the closed‐form solution for the optimal bidding strategy of the bidders and the optimal BIN price of the seller when they are both risk‐averse. The seller is shown to be strictly better off with the BIN option, while the bidders are better off only when their valuation is high enough. The theory also implies that the expected transaction price is higher in an auction with an optimal BIN price than one without a BIN option. This prediction is confirmed by our data collected from Taiwan's Yahoo! auctions.