Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement

I empirically consider the effect of horizontal subcontracting on firm bidding strategies in California highway construction auctions. Subcontractors are hired by prime contractors prior to the auction, and the subcontractor may also be a competitor in the primary auction. While horizontal subcontracting may improve productive efficiency, it softens the horizontal subcontractor's bid strategy, since winning the auction may entail losing subcontracting business. I find that while each additional competitor supplied by the firm is estimated to increase its bid by 1.4 per cent, the winning bid is uncorrelated with horizontal subcontracting. This points toward an efficiency motive for cross‐supply.     

Position auctions

I analyze the equilibria of a game based on the ad auction used by Google and Yahoo. This auction is closely related to the assignment game studied by Shapley–Shubik, Demange–Gale–Sotomayer and Roth–Sotomayer. However, due to the special structure of preferences, the equilibria of the ad auction can be calculated explicitly and some known results can be sharpened. I provide some empirical evidence that the Nash equilibria of the position auction describe the basic properties of the prices observed in Google's ad auction reasonably accurately.     

Optimal choice of a reserve price under uncertainty

The revenue function for a standard auction is typically asymmetric around the revenue maximizing reserve price. Thus, choosing a reserve price that is smaller than the revenue maximizing reserve price can result in a substantially different loss than choosing one that is larger by the same amount. Therefore, when the revenue function is unknown, it is important to consider uncertainty around the revenue function and its asymmetric structure. For this purpose, I propose a Bayesian decision rule and illustrate its typical revenue gains. I then apply the rule to the bid data from the U.S. timber sales.     

Auctioneers sometimes prefer entry fees to extra bidders

We investigate a market thickness–market power tradeoff in an auction setting with endogenous entry. We find that charging admission fees can sometimes dominate the benefit of recruiting additional bidders, even though the fees themselves implicitly reduce competition at the auction stage. We also highlight that admission fees and reserve prices are different instruments in a setting with uncertainty over entry costs, and that optimal mechanisms in such settings may be more complex than simply setting a reserve price. Our results provide a counterpoint to the broad intuition of Bulow and Klemperer (1996) that market thickness often takes precedence over market power in auction design.     

Balancing Power Markets in Germany: Timing Matters

This paper analyzes timing issues on the German balancing power market. We focus the analysis on the length of the bidding period, i.e. the length of the time period a supplier has to provide balancing power capacities, and the question of how far before the beginning of a bidding period the auction should be carried out. We show that different load levels require different plants for the optimal provision of balancing power. In a longer bidding period, the power plants that have the lowest average cost in the bidding period are unlikely to be efficient in all hours of the bidding period. Hence, shortening bidding periods can increase efficiency. Furthermore, we show that an early commitment on a power plant’s mode of operation (when uncertainty about resulting spot prices is still relatively high) also reduces efficiency. This suggests that the auction should be held relatively close to the beginning of the bidding period. Furthermore, we discuss some advantages of a liquid real time market.     

ADVERSE SELECTION IN ELECTRONIC MARKETS: EVIDENCE FROM ONLINE STAMP AUCTIONS

We analyze adverse selection costs in online stamp auctions, based on a comparison of prices on eBay with those of matched stamps at a specialty stamps auction site in the U.S., Michael Rogers, Inc. (MR), which we know a priori has low quality uncertainty. We find that buyer prices are 10–15% lower on eBay as compared to MR, and the price difference, increases with the value of the stamps. Consistent with this adverse selection discount we find that the seller reputation mechanism on eBay has an economically modest, although statistically significant, effect on auction price and probability of sale.     

Should auctioneers supply early information for prospective bidders?

Consider an auction in which potential bidders must sink an entry investment before learning their values, but where the auction designer can release information so that the bidders learn their values before entry. Such early information will induce screening of high-value bidders, and it will give rise to information rents and thereby a difference between the socially optimal auction and the auctioneer's preferred mechanism. Therefore, the auction designer has too weak an incentive to produce early information. Early information may increase or reduce equilibrium entry. If entry is sufficiently reduced, early information will harm the auction designer.     

The effect of competition on eBay

I examine the effect of competition on eBay Motors. I specify a simple model of auction choice and show that the expected transaction price falls with an increase in the number of competitors. I then test for this effect using data from 5,500 auctions for Chevrolet Corvettes. To address potential endogeneity of the level of competition, I introduce an instrument which takes advantage of the unique features of eBay. Results indicate that an additional competitor leads to a 6% reduction in the final transacted price ($960 for the average car). Further, I provide evidence that this effect is due to the thinning of the bidder market rather than dynamic bidding.     

Auctions with quantity externalities and endogenous supply

This paper studies the design of license auctions when the number of licenses allocated in the auction determines structure of the post-auction market. I first show that a sequence of conditional reserve prices that specify minimum acceptable bid at each supply level can be used to determine supply endogenously. Then I construct a static auction called multi-dimensional uniform-price auction and a dynamic auction called Walrasian clock auction that allow the auctioneer to condition reserve price on supply and allow bidders to condition bids on supply. I show that both proposed auctions can implement the efficient market structure that maximizes total surplus in the post-auction market in a dominant strategy equilibrium. I next characterize the optimal auction and show that the two proposed auctions can yield the optimal revenue under a sequence of optimal reserve prices.     

Spectrum Auction Design

Spectrum auctions are used by governments to assign and price licenses for wireless communications. The standard approach is the simultaneous ascending auction, in which many related lots are auctioned simultaneously in a sequence of rounds. I analyze the strengths and weaknesses of the approach with examples from US spectrum auctions. I then present a variation-the combinatorial clock auction-which has been adopted by the UK and many other countries, which addresses many of the problems of the simultaneous ascending auction while building on its strengths. The combinatorial clock auction is a simple dynamic auction in which bidders bid on packages of lots. Most importantly, the auction allows alternative technologies that require the spectrum to be organized in different ways to compete in a technology-neutral auction. In addition, the pricing rule and information policy are carefully tailored to mitigate gaming behavior. An activity rule based on revealed preference promotes price and assignment discovery throughout the clock stage of the auction. Truthful bidding is encouraged, which simplifies bidding and improves efficiency. Experimental tests and early auctions confirm the advantages of the approach.     

Risk aversion and auction design: Theoretical and empirical evidence

Auctions are inherently risky: bidders face uncertainty about their prospects of winning and payments, while sellers are unsure about revenue and chances of a successful sale. Auction rules influence the allocation of risk among agents and the behavior of risk-averse bidders, leading to a breakdown of payoff and revenue equivalence and a heightened significance of auction design decisions by sellers. In this paper, we review the literature on risk aversion in auctions, with an emphasis on what can be learned about auction design from theoretical modeling and empirical studies. We survey theoretical results relating to the behavior of risk-averse agents in auctions, the comparison of standard auction formats in the presence of risk aversion and implications for auction design. We discuss standard and more recent approaches to identifying risk preferences in empirical studies and evidence for the significance of risk aversion in auction applications. Finally, we identify areas where existing evidence is relatively scant and ask what questions empirical research might ask given the theory and where further theoretical research may be beneficial given existing empirical results.     

How Do Land Auction Formats Influence the Market Structure and Aggregate Surplus of Real Estate Development?

This article proposes a duopoly dynamic game theoretic model to investigate the market structure and aggregate surplus of real estate development when land is sold in a sealed‐bid first price auction vis‐à‐vis an open English auction. It relaxes the assumption of symmetric bidders. The land values have common value and private value components. We find that the sealed‐bid first price auction introduces competition in the real estate development market. The open English auction leads a monopoly market. State agencies are recommended to increase the aggregate surplus of real estate development by publishing past bidding information under the sealed‐bid first price auction and reducing information asymmetry between bidders.     

Bids for the UMTS system: An empirical evaluation of the Italian case

The aim of this paper is to analyze the licensing of the telecommunication spectrum as a public good and the search for equilibrium prices through bilateral bargaining and multilateral bidding. It develops a general model of price setting under dynamic uncertainty and applies it to the Italian auction for Universal Mobile Telecommunications System (UMTS). The empirical application shows that the model can be used both to determine the base price as well as other desirable characteristics to organize an auction and to better understand, after the auction is closed, what really happened in terms of the critical factors involved. After recalling some basic concepts on spectrum rights and reviewing the general experience with UMTS auctions in Europe, the formal model and its application are presented. The results confirm certain views on the Italian auction, which are widely shared but were never tested before, namely that: (i) given the initial price, the number of licenses offered for the bidding should have been fewer, or alternatively, (ii) given the number of licenses, the base price should have been higher and (iii) the main bidder underpaid for the license. The model also allows us to quantify the bidders’ reservation price and the State and the bidders’ implicit bargaining powers.     

Empfehlungen für das Auktionsdesign für Emissionsberechtigungen

From an economic perspective, auctions are an appropriate mechanism for the initial allocation of emissions allowances, because they tend to be advantageous with respect to distributional and efficiency goals. Different auction designs can lead to different outcomes, though, and so the choice of the auction rules is a critical challenge. Recent developments in auction theory and rich experiences with practical auction design in the energy and many other sectors can help avoiding mistakes and designing an appropriate auction mechanism. This study summarizes the relevant research and concludes with concrete recommendations for the auction design for CO₂ allowances. In particular, it analyzes how the strategic options of buyers and sellers depend on the auction rules, and explains how secondary markets for allowances interact with bidding strategies and optimal institutional design.     

Auction Platform Design and the Linkage Principle

This paper examines an auction platform in which the monopoly platform maximizes profits by adjusting participation fees and choosing an auction format. The seller has private information on the quality of the good, and each participating buyer receives a private signal about his valuation of the good. The choice of auction format determines the allocation of trading surplus between the seller and buyers. This paper shows that when the seller's type is affiliated with the buyers' signals, the platform can charge higher participation fees on both sides by choosing a first‐price or descending auction than a second‐price or ascending auction.     

Measuring the Economic Effect of Global Warming on Viticulture Using Auction,Retail, and Wholesale Prices

In this paper we measure the effect of year-to-year changes in the weather on wine prices and winery revenue in the Mosel Valley in Germany in order to determine the effect that climate change is likely to have on the income of wine growers. A novel aspect of our analysis is that we compare the estimates based on auction, retail, and wholesale prices. Although auction prices are based on actual transactions, they provide a thick market only for high quality, expensive wines and may overestimate climate’s effect on farmer revenues. Wholesale prices, on the other hand, do provide broad coverage of all wines sold and probably come closest to representing the revenues of farmers. Overall, we estimate a 1°C increase in temperature would yield an increase in farmer revenue of about 30%.     

Uncertain regulatory timing and market dynamics

Using a dynamic model of capacity accumulation, I examine the relationship between uncertainty about the timing of a new Pigouvian tax and oligopolistic competition. I find that for some market structures uncertainty about the timing of the regulatory change leads firms to increase investment. These results stem from the nature of the uncertainty and its interaction with firms' strategic incentive to engage in capacity races. They dramatize the importance of accounting for initial conditions when forecasting firms' reactions to anticipated regulatory changes. In addition, I find that more protracted uncertainty leads to greater welfare costs.     

When can auctions maximize post-auction welfare?

I study auctions in which firms bid for licenses that reduce their marginal costs in a post-auction downstream market. When there are three or more firms, I show that the Vickrey–Clarke–Groves (VCG) auction maximizes consumer surplus in dominant strategies if and only if it maximizes producer surplus in dominant strategies. With two firms, the effect on consumer surplus is ambiguous. When the VCG auction does not maximize consumer surplus, I show that consumer surplus can be maximized by adding caps, i.e., restricting the number of licenses a bidder can win. This might lower producer surplus.     

Auctions with contingent payments — An overview

I survey a literature on auctions with contingent payments, that is auctions in which payments are allowed to depend on an ex-post verifiable variable, such as revenues in oil lease auctions. Based on DeMarzo et al. (2005), I describe a partial ranking of auction revenues for auctions that differ in terms of contract forms, pricing rules and seller commitment and why the revenue equivalence theorem does not apply even in an independent private values setup. I discuss models that incorporate adverse selection, moral hazard, competition between auctioneers, common values and the sale of multiple units.     

Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory

Within an infinitely repeated game, I compare the level and conduct of collusion under uniform and discriminatory auctions. For this purpose, I characterize the optimal collusive schemes and sets of sustainable profits under these auction formats. I show that uniform auctions facilitate collusion more than discriminatory auctions: the optimal penal code is equally severe under the two formats; but bidders' deviation incentives are weaker in uniform auctions given that the pay-off irrelevant bids can be used to relax the enforcement problem. This discussion is particularly relevant after the recent reforms in the electricity industry in England & Wales, and elsewhere.