Auctions with bid credits and resale

Bid credits favoring subsets of bidders are routinely imposed on auctions and procurement auctions. These bid credits result in inefficient auction outcomes, which create pressure for post-auction resale or, in a procurement context, for subcontracting. We show that the presence of resale, in turn, affects bidding strategies in such a way that auction outcomes are more likely to be inefficient and less informative, making it harder for resale to correct inefficiencies. The negative effects of bid credits and resale can be mitigated through direct restrictions on resale, tight caps on credits, reserve prices, anonymous bidding, and enhanced competition.     

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.     

The Impacts of an Antitrust Investigation: A Case Study in Agriculture

We analyze the impacts of an antitrust investigation on the purchasing practices of a buying collaboration and its common bidding agent. Using a repeated cross section of prices across procurement auctions that were and were not subjected to the investigation, we find that auction prices in the targeted auctions: (i) significantly increased as soon as the targets were made aware they were under investigation; (ii) remained higher as long as the investigation was open; and (iii) systematically declined to the same low pre-knowledge state after the closure of the investigation without prosecution. Finally, the counterfactual impact on auction prices by the removal of the common bidding agent and the demise of the buying collaboration at a later date was on par with the impacts of the investigation.     

Rational bidding in a procurement auction with subjective evaluations

In practice, procurement auctions often involve subjective evaluations of bids, especially when consisting of quality or design parameters which are hard to quantify. We formally define a notion of subjectivity in an auction environment and analyze the implications for rational bidding behavior. Our findings explain some observed bidding behaviors that are inconsistent with standard equilibrium predictions. Finally we examine the way subjectivity facilitates the practice of favoritism on part of the auctioneer.     

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.     

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.     

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.      

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.     

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.     

Polish experience from first-ever spectrum auction

The Polish 4G spectrum auction was a watershed event for the Polish telecommunications market. For the first time in history, the Office of Electronic Communications decided to award spectrum by using an auction process. Polish regulators implemented a simultaneous multiple-round ascending-bid auction, which was widely used worldwide for selling spectrum. The process leading to the auction and the auction itself was lengthy and eventful. Due to the wrong auction design, the auction dragged on indefinitely, causing a delay in spectrum distribution. The auction ended only as a result of the government's intervention, after 8 months (513 rounds) of bidding that raised revenue of over PLN 9 billion (over EUR 2 billion). This paper describes in detail the rules of the Polish 4G auction, analyses bidding behaviour and auction dynamics of the crucial phases of auctions, and presents the final outcomes. It also draws lessons that could help policy makers in Poland and other countries in auction design.     

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.     

How to Set Minimum Acceptable Bids, with an Application to Real Estate Auctions

In a general auction model with affiliated signals, common components to valuations and endogenous entry, we compute the equilibrium bidding strategies and outcomes, and derive a lower bound on the optimal reserve price. This lower bound can be computed using data on past auctions combined with information about the subsequent sales prices of unsold goods. We illustrate how to compute the lower bound using data from real estate auctions.     

Uncertainty and Auction Outcomes: Evidence from Used Car Actions

I study the sequence of bidding in an open-outcry English auction to examine how uncertainty affects auction outcomes. I do this by analyzing a data set that was collected from a series of public auctions of used cars in New Jersey. I conjecture that the uncertainty is related to the auction’s progress and demonstrate that, empirically, an increase in the uncertainty is associated with an increase in the number of rounds that is required to sell an object and with a reduction in the ratio of the selling price to the presale estimate.     

Auctions for universal service obligations

This paper proposes the use of auctions for determining which carriers should undertake a universal service obligation, and what compensation they should receive for performing this function. From the regulator's perspective the auction would reveal carriers’ valuations of the USO, determine the number of USO providers endogenously, and provide an alternative to traditional cost-of-service regulation. Since bidding is a voluntary action by the firms, auctions would serve also to discipline the regulator. While auctions are compatible with competitive local service markets, they can also serve as a transition to competitive markets.     

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.     

Governance and game theory: When do franchise auctions induce firms to overbid?

The use of auctions as an instrument of public policy has been hailed as evidence of the utility and validity of game theory. In this paper, we focus on extreme cases – centrally, spectrum auctions in the UK and Germany in 2000 – to argue that the canonical game theoretic interpretations of firm behaviour in some (highly “successful”) auction outcomes are inadequate, that the economics of governance critique of franchise bidding can be extended to provide a better interpretation, and that under specified conditions, notably high uncertainty, policy-makers should design franchise auctions to avoid overbidding, rather than attend to the more conventional challenge of underbidding.     

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.     

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.     

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.