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.     

Inferring ascending auction participation from observed bidders

Participation in internet auctions goes well beyond those who place a bid. Participants arrive in random order, and if the auction’s standing price has already exceeded a participant’s valuation, she will not bid. Even so, her unreported valuation is a relevant part of demand for the item, and in an alternate random order, her bid would have been registered. I provide a method to estimate the average number of participants from the average number of bidders per auction. This enables estimation of the distribution of participant valuations from either the distribution of closing prices or the distribution of all observed bids.     

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.     

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.     

Reserve Prices in Repeated Auctions

This paper aims to estimate the effect of imposing a reserve price in repeated auctions of homogeneous items. I model the behavior of impatient bidders who search for the best auction outcome over time. The model is used to develop estimating equations for the bidders’ valuations, and to evaluate the effect of reserve prices on bids and revenue. Using data collected from surplus auctions of personal computer processors, I find economically significant gains from imposing a reserve price. The revenue-maximizing reserve price improves revenue by about 23% for a large subsample of the auctions in the data.     

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.     

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.     

NON‐COOPERATIVE ENTRY DETERRENCE IN LICENSE AUCTIONS: DYNAMIC VERSUS SEALED BID*

We examine the impact of potential entry on incumbent bidding behavior in license auctions, in both dynamic and sealed bid formats. Unlike sealed bid auctions, dynamic auctions reveal information about the identities of potential winners and allow bidders to revise their bids. This helps incumbents to coordinate their entry deterrence efforts. If entry is sufficiently costly for each incumbent, only the dynamic auction has an equilibrium where entry is deterred for sure. Numerical calculations suggest that, regardless of how costly entry is for each incumbent, sealed bid auctions can generate a higher probability of entry as well as a more efficient allocation.     

Horizontal mergers with synergies: Cash vs. profit-share auctions

We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals' beliefs through their bids. We compare cash and profit-share auctions, first- and second-price, supplemented by entry fees. Since non-merged firms benefit from a merger if synergies are low, bidders are subject to a positive externality with positive probability; nevertheless, pooling does not occur. Unlike cash auctions, profit-share auctions are not revenue equivalent, and the second-price profit-share auction is more profitable than the other 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.     

The Role of Undisclosed Reserves in English Open Outcry Auctions

This study considers the role that reserve prices may play in residential property auctions. In comparison to much of the previous empirical work, this study has access to undisclosed reserve prices from English auctions. Consistent with theoretical arguments in the auction literature, the results obtained illustrate that while higher reserve prices increase the revenue obtained for the seller, they also reduce the probability of sale. The findings also highlight the importance of auction participation, with the number of individual bidders and the number of bids significant in most specifications.     

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.     

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.     

Market Mechanism Choice and Real Estate Disposition: Search Versus Auction

We propose a model of mechanism choice in the disposition of real estate assets where we consider two alternatives: a search market and an auction. Within the search framework, we derive an equilibrium whereby buyers incur search costs and sellers incur holding costs for the period during which the property is not sold. In the auction alternative, the seller joins an existing pool of sellers in undertaking a multiple–object auction and pays a commission upon sale. Buyers and sellers freely choose their mechanisms, which in equilibrium are optimal given each group's conjectures about the mechanism choice of their counterpart. In equilibrium, an agent cannot benefit from deviating from his choice and each agent's beliefs are consistent with the equilibrium outcome. It is shown that (a) buyers with high search costs will choose auctions because the auction payoff imposes an upper bound on buyers' gains from search, and (b) prices at auctions will be higher. Using vacant lot sales data and a method–of–moment estimator which accounts for the presence of an endogenous discrete mechanism choice variable, we estimated a hedonic regression to detect the price effect. It was determined that, on average, lots sold for $1.44 per square foot more in auctions than in the search market, as predicted by our model.     

Is the ‘Linkage Principle’ Valid? Evidence from the Field

We present field evidence concerning experienced bidders that supports the linkage principle—specifically, the prediction that in affiliated‐values auction environments the expected revenues generated at open‐outcry, ascending‐bid auctions are higher than those under auction formats that reveal less information to participants. Using field data from a large seller of automobiles who experimented with different selling formats, we have found that average revenues were significantly higher under an English auction than under a dynamic Internet auction format that revealed less information to bidders.     

Empirical tests of information aggregation

This paper proposes tests to empirically examine whether auction prices aggregate information away from the limit. These tests are applied to a unique data set containing winning bids and measures of the value and dispersion of information signals in eBay auctions for computers. Results suggest that prices partially aggregate information but do not converge to the common value. Even away from the limit, more bidders and stronger information have a significant effect on the convergence of prices and information aggregation. Even partial information aggregation may represent a potential efficiency gain over one-to-one trade of used goods with uncertain common values.     

THE EFFECT OF AUCTION FORMAT ON EFFICIENCY AND REVENUE IN DIVISIBLE GOODS AUCTIONS: A TEST USING KOREAN TREASURY AUCTIONS*

This paper measures the efficiency and revenue properties of the two most popular formats for divisible goods auctions: the uniform‐price and discriminatory auction. We analyze bids into the Korean Treasury auctions which have used both formats. We find that the discriminatory auction yields statistically higher revenue. Unlike previous work that uses data from only one format, we are able to compare the efficiency properties of the two formats. We find that the discriminatory auction better allocates treasury bills to the highest value financial institutions. However, the differences in revenue and efficiency are not large because the auctions are very competitive.     

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.      

On-line spectrum auctions in TV white spaces for supporting mobile services—A practical manual

This paper considers an approach for dynamic short-term spectrum leasing in TV white spaces (TVWS) using an on-line auction. The secondary spectrum market discussed here is organized by a central entity called the spectrum broker. The auctioned spectrum appears in blocks of available DVB-T channels with some transmit power constraints set-up to protect the primary users (DVB-T receivers). The bidders are institutional spectrum operators (telecommunication companies or service providers), operating in a given area. These players are characterized by heterogeneous demands concerning the spectrum bandwidth, the operation period with temporarily-exclusive rights for using the spectrum and the transmit power needed for successful transmission. Thus, the auctioned objects are non-identical and present different value for different players. Two auction models are proposed. The first one is the simultaneous auction in time domain and combinatorial in frequency and power dimension. The second proposed auction is fully combinatorial. Simulations results are also provided showing effectiveness of the analyzed auctions (high spectrum utilization ratio) and relation between the players’ satisfaction, their spectrum valuation and varying competition. Finally the guidelines concerning the spectrum auctions in TVWS for the policy makers are proposed.     

Price Formation Under Small Numbers Competition: Evidence from Land Auctions in Singapore

This article examines the price formation process under small numbers competition using data from Singapore land auctions. The theory predicts that bid prices are less than the zero-profit asset value in these first-price sealed-bid auctions. The model also shows that expected sales price increases with the number of bidders both because each bidder has an incentive to offer a higher price and because of a greater likelihood that a high-value bidder is present. The empirical estimates are consistent with auction theory and show that the standard land attributes are reflected in auction prices as expected.