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.     

Auction choice

While there is a big literature that compares revenue in common auctions, very little attention has been paid to the economic significance of revenue rankings. In this paper we develop a robust method for computing equilibrium bid functions and comparing revenue from the sealed high-bid and open auctions. We use our program to show that the effects of affiliation and risk aversion are typically small, while the effects of asymmetry are economically large unless the auctioneer has as much information about bidders as they do about each other.We also characterize the effects of asymmetry for the n-bidder case.     

Bidder Asymmetry in Infrastructure Procurement: Are There any Fringe Bidders?

Asymmetric auctions are among the most rapidly growing areas in the auction literature. The potential benefits from intensified auction competition could be enormous in the public procurement context. Entrant bidders are considered a key to enhance competition and break potential collusive arrangements among incumbent bidders. Asymmetric auction theory predicts that weak (fringe) bidders would bid more aggressively when they are faced with a strong (incumbent) opponent. Using data from official development projects, this paper shows that entrants actually submitted aggressive bids in the presence of incumbent(s) in the road sector and to a certain extent in the water sector. For electricity projects, the general competition effect is found to be particularly significant, but the entrant effect remains unclear. The results suggest that auctioneers should foster competition in public procurement, including fringe bidders, to contain public infrastructure investment costs.     

Penny auctions

This paper studies penny auctions, a novel auction format in which every bid increases the price by a small amount, but placing a bid is costly. Outcomes of real-life penny auctions are often surprising. Even when selling cash, the seller may obtain revenue that is much higher or lower than its nominal value, and losers in an auction sometimes pay much more than the winner. This paper characterizes all symmetric Markov-perfect equilibria of penny auctions and studies penny auctions’ properties. The results show that a high variance of outcomes is a natural property of the penny auction format and high revenues are inconsistent with rational risk-neutral participants.     

First‐Price Sealed‐Bid Tender versus English Open Auction: Evidence from Land Auctions

This article compares whether the first‐price sealed‐bid tender or the ascending English open auction generates higher revenue for the seller. Using a unique set of data for land sales and accounting for the presence of an endogenous discrete mechanism choice variable, our results show that the first‐price sealed‐bid tender generates a lower land price, in the range of 1.2–9.6%, than the English open auction. Our results validate the theoretical prediction that open auctions result in higher prices because bidders can infer other bidders’ information by observing their bids in the common value auction paradigm.     

MERGER, EASE OF ENTRY AND ENTRY DETERRENCE IN A DYNAMIC MODEL

We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.     

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.     

Spectrum auctions in a thin market: The Korean case

In 2010, the Korean government adopted spectrum auctions and introduced a market mechanism into spectrum management. However, the government has often been confronted with conflicts between diverse policy goals of spectrum auctions. A thin spectrum market, where only three incumbent MNOs bid for spectrum, has led to concerns that the government may fail to maximize revenues.Based on the past experiences in Korea, this paper examines the Korean government's choice of auction rules in the face of conflicting policy goals. This paper also recommends that the government implement the following regulatory reforms and consider the auction related measures to deepen its spectrum market or increase the number of bidders: (i) relaxation of foreign ownership restrictions, (ii) introduction of regional or site-specific spectrum licenses, and (iii) modification of auction formats. Spectrum markets tend to be thin in many countries, and the Korean experience may offer implications for those countries when they implement spectrum auctions.     

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.     

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.     

Effects of Minimum Bid Increments in Internet Auctions: Evidence from a Field Experiment

I study the role of minimum bid increments (MBI) in internet auctions using natural field experiment data from a Finnish online auction site Huuto.net. Internet auctions are typically viewed as second‐price, implying truthful bidding. However, due to the presence of the MBI, equilibrium bidding behavior involves bid shading. I sell otherwise identical gift cards while varying the MBI and test between truthful bidding and bid shading. Truthful bidding is rejected. Consistently with equilibrium behavior, bid shading increases as the MBI increases. This implies that real‐world bidders are capable of reacting rationally even to seemingly small variations in their strategic environment.     

An Empirical Analysis of Entrant and Incumbent Bidding in Road Construction Auctions

This paper explores differences in the bidding patterns of entrants and incumbents in road construction auctions. We find that entrants bid more aggressively and win auctions with significantly lower bids than incumbents. The differences in their bidding patterns are consistent with a model of auctions in which the distribution of an entrant's costs exhibits greater dispersion than that of an incumbent's and relations of stochastic dominance in the distributions do not persist for the entire range of estimated costs. We also find that more efficient firms bid, on average, more aggressively and firms with greater backlogs bid less aggressively.     

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.     

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.     

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.     

Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.     

Asymmetric information in oil and gas lease auctions with a national company

This paper analyzes bidding behavior in oil and gas tract auctions in Brazil, where the main winner has been Petrobras, a national company. We test predictions from the theory of common-value, first-price, sealed-bid auctions with asymmetric information. The tests indicate that Petrobras was better informed about tract values than other bidders. We show that Petrobras bid higher than its competitors for more profitable tracts, and that it bid more frequently than its competitors for tracts being re-offered after receiving no bids in previous auctions. We also find evidence that Petrobras could bid competitively in a limited number of auctions only, and we discuss how our results can help to improve oil and gas tract auction rules.     

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.     

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.     

Product specification under a threat of entry: Evidence from Airlines’ departure times

I examine how incumbent airlines adjust their departure times in response to the threat of entry by Southwest Airlines. I find that incumbents space their flights more evenly throughout the day when faced with potential entry. This reaction depends strongly on the level of the incumbent’s market share and hub status at the endpoint airports of a market. The evidence suggests that incumbents’ actions are designed to deter, rather than accommodate, entry. I do not find effects on flight frequency, suggesting that incumbents may rely more on the strategic choice of product attributes than on product proliferation to deter entry.