RULE CHANGES AND UNCERTAINTY IN DISCRIMINATORY AND UNIFORM PRICE AUCTIONS

The auction literature indicates that uncertainty about the value of auctioned goods increases underpricing in discriminatory price auctions. Such uncertainty has a smaller effect on uniform price auctions because the pricing rule aggregates bidders' information. We find that uncertainty resulting from inexperience with an auction mechanism has similar effects. Using initial public offering (IPO) data from Japan and Israel, we find that average underpricing increases temporarily in Japan's discriminatory price auctions after changes in the auction rules, which suggests that bidders reduce their bids in response to uncertainty. Underpricing in Israel's uniform price auctions is not affected by rule changes.     

Bounds on revenue distributions in counterfactual auctions with reserve prices

Measuring auction revenues under counterfactual reserve prices or formats requires knowledge of distributions of bidders' values and private signals. This poses a challenge when bids are observed from first‐price, common‐value auctions. I bound counterfactual revenue distributions without imposing parametric restrictions on the model structure. Using data from U.S. municipal bond auctions, I find first‐price and second‐price auctions under optimal reserve prices lead to little improvement in revenues over existing first‐price formats. The number of bidders has a more significant impact on revenues in optimal auctions. I also find invoking an incorrect assumption of private values in counterfactual analyses results in small errors in predicting revenues from optimal second‐price auctions.     

Auctions vs. negotiations in takeovers with initial stakes

Takeover attempts from raiders with prior stakes in the target company (toeholds) are frequent in the market for corporate control. In this context, we propose a simple and realistic selling mechanism with an agenda of exclusive negotiations that discriminates against larger-toehold raiders. When a reserve price is absent, it is shown that this negotiation procedure outperforms, in terms of expected target price, conventional auctions frequently used to model takeover battles. However, when standard auctions can be improved with an optimal reserve price, our results indicate that this target price superiority is sensitive to the degree of toehold asymmetry.     

Bidding into the Red: A Model of Post-Auction Bankruptcy

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second‐price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first‐price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first‐price auction over the second‐price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second‐price auction.     

“Upping the ante”: how to design efficient auctions with entry?

Of primary importance in auction design is the set of strategies available to the seller at the auction stage. We first formalize hold‐up regarding entry costs that preys on second‐price auctions when the seller may engage in a costly shill‐bidding activity. We derive the optimal reserve and show how shill bidding can make posted prices outperforming auctions. Second, we advocate for a new regulation where shills would be banned but with the possibility of canceling sales ex post, which offers some valuable flexibility: the English auction with jump bids implements, then, the first best in general environments.     

Regulating bidder participation in auctions

Regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry. We show that the relative performance of two such mechanisms, a standard first‐price auction with free entry and an entry rights auction, depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism. As an empirical application, we estimate parameters from first‐price auctions with free entry for bridge‐building contracts in Oklahoma and Texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly.     

Tacit collusion and capacity withholding in repeated uniform price auctions

This article analyzes tacit collusion in infinitely repeated multiunit uniform price auctions in a symmetric oligopoly with capacity‐constrained firms. Under two popular definitions of the uniform price, when each firm sets a price‐quantity pair, perfect collusion with equal sharing of profit is easier to sustain in the uniform price auction than in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. Even when firms may set bids that are arbitrary finite step functions of price‐quantity pairs, in repeated uniform price auctions maximal collusion is attained with simple price‐quantity strategies exhibiting capacity withholding.     

On absolute auctions and secret reserve prices

From a theory viewpoint, the use of auctions with zero public reserve prices, also called absolute auctions, or of auctions with secret reserve prices, is somewhat puzzling despite being common. By allowing that buyers differ in their processing of past data regarding how the participation rate varies with the auction format and how reserve prices are distributed when secret, we show in a competitive environment that these auction formats may endogenously emerge. We also analyze how buyers with various sophistications and sellers with various costs sort into the different formats, thereby offering a range of testable predictions. Alternative approaches are reviewed.     

An empirical study of auction revenue rankings: the case of municipal bonds

Using a novel dataset of 386 first‐price municipal bond auctions held in California, I perform counterfactual revenue comparisons, based on the theoretical result of Milgrom and Weber (1982). I show that the revenue in the second‐price auction is nonparametrically identified, and the counterfactual revenue in the English auction can be bounded in an informative way. These results form a basis for nonparametric estimation of counterfactual revenue differences. I find that the revenue gain from using the English auction would be in the range of 11%—19% of the gross underwriting spread, and that most of it would already be captured by using the second‐price auction. The recent explosive growth of Internet English auctions, administered by Grant Street Group, provides external support to the claim that auction design matters in this market.     

Real estate auctions: A survey of theory and practice

Recent downturns in real estate markets combined with a general acceptance of auctions have resulted in an unprecedented number of auction sales. A need therefore exists for the further development of real estate auction models that can provide insights into this emerging market institution. To facilitate this task a survey of auction theory as pertaining to its application in real estate markets is provided in this paper. Topics addressed includes bidding equilibria, the role of reserve prices, information disclosure, the decision to use auctions, bidder participation, and multiple-object sales. An overview of empirical studies in this area is also provided.     

Simultaneous Pooled Auctions

Suppose a seller wants to sell k similar or identical objects and there are n > k potential buyers. Suppose that each buyer wants only one object. In this case, we suggest the use of a simultaneous auction that would work as follows. Players are asked to submit sealed bids for one object. The individual with the highest bid chooses an object first; the individual with the second-highest bid chooses the next object; and this process continues until the individual with the kth highest bid receives the last object. Each individual pays the equivalent to his or her bid. When objects are identical, we show that the proposed auction generates the same revenue as a first-price sealed-bid sequential auction. When objects are perfectly correlated, there is no known solution for sequential auctions, whereas we can characterize bidding strategies in the proposed auction. Moreover, the proposed auction is optimal (given an appropriately chosen reserve price), and it may be easier and cheaper to run than a sequential auction.     

Estimation in English auctions with unobserved heterogeneity

We propose a framework for identification and estimation of a private values model with unobserved heterogeneity from bid data in English auctions, using variation in the number of bidders across auctions, and extend the framework to settings where the number of bidders is not cleanly observed in each auction. We illustrate our method on data from eBay Motors auctions. We find that unobserved heterogeneity is important, accounting for two thirds of price variation after controlling for observables, and that welfare measures would be dramatically misestimated if unobserved heterogeneity were ignored.     

Are CDS Auctions Biased and Inefficient?

We study the design of credit default swaps (CDS) auctions, which determine the payments by CDS sellers to CDS buyers following defaults of bonds. Using a simple model, we find that the current design of CDS auctions leads to biased prices and inefficient allocations. This is because various restrictions imposed in CDS auctions prevent certain investors from participating in the price discovery and allocation process. The imposition of a price cap or floor also gives dealers large influence on the final auction price. We propose an alternative double auction design that delivers more efficient price discovery and allocations.     

Timing of bids at pooled real estate auctions

When many similar properties are being auctioned, auctioneers often resort to the pooled design. The winning bidder of a given round is given a choice among all the unclaimed (pooled) properties. Bidding strategy depends on expectations of rival bidders' behavior as well as personal valuation. Anecdotal evidence from condominium auctions suggests that bidding decisions can produce price anomalies. This study develops a simple theoretical model with three active bidders and three units for sale to show how such anomalies may emerge. Estimation is then made of a hedonic price model using data from a condominium auction of 53 units on three separate dates. The empirical results support the view that the best buys are found in the middle of the auction with overpayments at the beginning and end.     

Call auction algorithm design and market manipulation

It is commonly accepted that closing call auctions provide investors with access to closing prices, reduce volatility and reduce price manipulation. This paper argues that call auction design may influence the achievement of these objectives. The paper focuses on one aspect of call auction design, namely the matching algorithm used to set auction prices. Analysis of two real market cases indicates that different algorithms set different prices. The results also indicate that manipulation has a significant impact on call auction prices, with some algorithm designs more effective than others at reducing the impact of manipulation. Alternate call auction design features, such as volatility extensions, may be necessary to more effectively reduce closing price manipulation.     

A note on price noises and their correction process: Evidence from two equal-payoff government bonds

The study offers the most direct evidence to date on price noises in call auctions and their correction. We examine a unique sample of two identical securities (two equal-payoff Israeli government bonds) that were traded on separate yet almost simultaneous auctions on the Tel-Aviv Stock Exchange (TASE). The prices of the bonds were equal on average. However, on most of the sample days there were price differences between the bonds. Various estimates suggest that the price noise in one bond is practically uncorrelated with that of the other, and both disappear by the end of the next-day auction.     

REVISITING BOOKBUILDING VERSUS AUCTION IPOS: A PERSPECTIVE OF INFORMATIONALLY EFFICIENT PRICES IN THE AFTERMARKET

We compare price efficiency between auction and bookbuilding initial public offerings (IPOs). Our empirical results fail to support the prevailing conjecture that bookbuilding IPOs are more price efficient than auction IPOs. We find statistical insignificance between two IPO samples or weak evidence for the opposite hypothesis. We add to the evidence that auctions yield aftermarket price efficiency equal to that of bookbuilding or are statistically indifferent when measured by market microstructure and Center for Research in Security Prices (CRSP) data. We also examine whether underlying price efficiency forces reflect the relative presence of informed institutional and retail investors, aftermarket price support, and divergence of investor expectations.     

China's land market auctions: evidence of corruption?

In China, urban land is allocated by leasehold sales by local officials. Attempting to end widespread corruption, the government now requires sales to be conducted publicly, by either English or “two‐stage” auctions. However, corruption persists through the choice of auction format and preauction side deals between favored bidders and local officials. Two‐stage auctions have a first stage where favored developers signal that auctions are “taken,” deterring entry of other bidders. Empirics show that both sales prices and competition are significantly less for two‐stage than English auctions. Selection on unobserved property characteristics is positive: officials divert hotter properties to two‐stage auctions.     

INFLUENCE OF TREASURY BILL FUTURES TRADING ON THE PRIMARY SALE OF THE DELIVERABLE TREASURY BILL

This paper investigates the impact of the presence of Treasury bill (T-bill) futures market contracts on the primary auction price of deliverable T-bills. Of the 52 weekly three- and six-month T-bill auctions, only four are deliverable against the T-bill futures market contract. This unique ability to deliver may command a premium price in the primary market. The results of this study support this hypothesis with regard to the six-month auction but are inconclusive with regard to the three-month auction. Furthermore, there is some evidence that the 1983 rule change making the one-year T-bill a deliverable instrument reduced the size of the premium in the six-month bill auction.     

Buy‐out prices in auctions: seller competition and multi‐unit demands

Online auction sites often enable sellers to add a buy‐out price. In one‐shot auctions, this has been motivated by appeal to impatience or risk aversion. We offer additional justification in a dynamic model, by showing that an early seller has an incentive to use a buy‐out price, if a similar product is offered later by another seller, and bidders desire multiple objects. Revenue in the first auction increases, but revenue in the second auction decreases, as does the sum of revenues. The buy‐out price causes the auction sequence to become inefficient, because the first item may be awarded to a bidder who should have received none.