Strategic bidding in multi‐unit auctions with capacity constrained bidders: the New York capacity market

This article employs a simple model to describe bidding behavior in multi‐unit uniform price procurement auctions when firms are capacity constrained. Using data from the New York City procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate on an equilibrium that extracts high rents for all bidders. I show theoretically and empirically that the largest bidder submits the auction clearing bid. All other bidders submit inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase.     

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.     

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.     

Colluding through suppliers

This article investigates downstream firms’ ability to collude in a repeated game of competition between supply chains. We show that downstream firms with buyer power can collude more easily in the output market if they also collude on their input supply contracts. More specifically, an implicit agreement on input supply contracts with above‐cost wholesale prices and negative fixed fees (that is, slotting fees) facilitates collusion on downstream prices. Banning information exchange about wholesale prices decreases the scope for collusion. Moreover, high downstream prices are more difficult to sustain if upstream rather than downstream firms make contract offers.     

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.     

Endogenous cartel formation with heterogeneous firms

In the context of an infinitely repeated capacity‐constrained price game, we endogenize the composition of a cartel when firms are heterogeneous in their capacities. When firms are sufficiently patient, there exists a stable cartel involving the largest firms. A firm with sufficiently small capacity is not a member of any stable cartel. When a cartel is not all‐inclusive, colluding firms set a price that serves as an umbrella with non‐cartel members pricing below it and producing at capacity. Contrary to previous work, our results suggest that the most severe coordinated effects may come from mergers involving moderate‐sized firms, rather than the largest or smallest firms.     

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.     

Collusion under monitoring of sales

Collusion under imperfect monitoring is explored when firms' prices are private information and their quantities are public information; such an information structure is consistent with several recent price‐fixing cartels, such as those in lysine and vitamins. For a class of symmetric oligopoly games, it is shown that symmetric equilibrium punishments cannot sustain any collusion. An asymmetric punishment is characterized that does sustain collusion and it has firms whose sales exceed their quotas compensating those firms with sales below their quotas. In practice, cartels could have performed such transfers through sales among the cartel members.     

Endogenous asymmetry in a dynamic procurement auction

We show how to numerically solve for a Markov‐perfect equilibrium of a dynamic auction game where a procurer repeatedly purchases construction services from capacity‐constrained firms. We find that the procurer is best off scheduling frequent auctions for small project sizes. Otherwise, firm capacity utilization rates become larger and more asymmetric, which softens competition and increases procurement costs. We also find that forward‐looking bidding dampens the competition‐softening effects of asymmetry: farsighted firms compete more intensely than myopic ones. This can undermine the goal of a bid‐preference‐style affirmative action program: more farsighted firms respond less to the asymmetry induced via bid preferences.     

Procurement with specialized firms

We analyze optimal procurement mechanisms when firms are specialized. The procurement agency has incomplete information concerning the firms' cost functions and values high quality as well as low price. Lower type firms are cheaper (more expensive) than higher type firms when providing low (high) quality. With specialized firms, distortion is limited and a mass of types earns zero profits. The optimal mechanism can be inefficient: types providing lower second‐best welfare win against types providing higher second‐best welfare. As standard scoring rule auctions cannot always implement the optimal mechanism, we introduce a new auction format implementing the optimal mechanism.     

Resale price maintenance and collusion

The article revisits the conventional wisdom according to which vertical restrictions on retail prices help upstream firms to collude. We analyze the scope for collusion with and without resale price maintenance (RPM) when retailers observe local shocks on demand or retail costs. In the absence of RPM, retail prices react to retailers' information, and deviations from collusive behavior are thus difficult to detect. By eliminating retail price flexibility, RPM facilitates the detection of deviations but reduces profits and thus increases the short‐run gains from a deviation. Overall, RPM can facilitate collusion and reduce total welfare when firms adopt it.     

“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.     

Price‐cap regulation and the scale and timing of investment

This article shows how scale economies affect regulated firms’ investment behavior and welfare‐maximizing regulation of price and quantity. Regulated firms invest in smaller, more frequent, increments than social planners, with greater investment distortions the greater the economies of scale. Regulators cap prices at lower levels than planners when economies of scale are moderate, and at higher levels when they are substantial. When quantity is also regulated, the average cost of building capacity increases but the price cap decreases. Immediately after firms make their initial investment, regulators want to transfer surplus from customers to shareholders by raising the price cap to induce additional investment.     

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.     

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.     

Does Joint Bidding Reduce Competition? Evidence from Hong Kong Land Auctions

This paper analyses firms’ bidding behavior in auctions for development land in Hong Kong. The real estate market in Hong Kong is considered to be oligopolistic as it is dominated by a few top real estate firms, which have strong financial strength/development capacity and large land banks. Joint bidding is used by other real estate firms (“large” firms) to pool resources/capital in order to compete with the top firms. We test whether joint bidding increases or decreases the level of competition in land auctions, using land auction data in Hong Kong from 1991 to 2011. We find that large real estate firms are more likely to be successful than top firms at auctions when bidding jointly. However, joint bidding/winning does not harm competition as reflected by the number of bids, bids per bidder and number of bidders. Land prices also increase significantly in auctions won by joint bidders or alliances of large developers. Our results suggest that joint bidding enhances competition by allowing large firms to act strategically by pooling their resources and act aggressively to compete with the top firms.

     

Collusion with (almost) no information

We analyze noncooperative collusion in an infinitely repeated Bertrand game, where each of the n firms receives a privately observed, i.i.d. cost shock in each period and firms only (and privately) observe whether they have “won” the unit mass of consumers. No other information is available and no communication is allowed. We prove that there exist equilibria in private strategies approximating first‐best profits when firms are sufficiently patient. In particular, productive efficiency obtains in the limit.     

When Less (Potential Demand) Is More (Revenue): Asymmetric Bidding Capacities in Divisible Good Auctions

We show that asymmetry in bidders’ capacity constraints plays an important role in inhibiting collusion and promoting competitive outcomes in multi-unit auctions in which the final value of the good is common knowledge. This effect appears to be related to the increased difficulty of coordination when there are significant differences between bidders. Due to its impact on collusive outcomes, asymmetry in bidding capacities has a more powerful impact on the seller’s revenue than does the auction type. Consistent with the finding in Sade et al. (2006) that the discriminatory auction is more susceptible to collusion than the uniform-price auction, asymmetry in capacity constraints has a greater impact in discriminatory auctions.We thank Emmanuel Morales-Camargo, Ira Luria and Yelena Larkin for their excellent research assistance. We have benefited from comments by Yishay Yafeh, Eugene Kandel, Dan Levin, David Genesove, Eric Hughson, Steve Rock, Peter Bossaerts, David McAdams two anonymous referees, participants at the 2005 International Meeting of the Economic Science Association in Montreal, the 2006 winter meeting of the Econometric Society in Boston, and seminar participants at the University of Cincinnati, Hebrew University, Federal Reserve Bank of Atlanta, Tel-Aviv University, the University of Notre Dame, and Ben-Gurion University. Sade thanks the Israel Science Foundation (ISF 480/05) and the Krueger Center for Finance at the Hebrew University of Jerusalem for partial financial support.     

Auction Price Formation with Costly Occupants: Evidence Using Data from the Osaka District Court

Foreclosure properties sold at Japanese judicial auctions are delivered to buyers with an unclear title when occupants exist, because the foreclosure laws protect occupants from compulsory execution of auctions. The existence of occupants theoretically affects the auction price through two channels. First, it affects the reserve price, and this changes in auction price. Second, the number of bidders changes in response to changes in the reserve price that is controlled by occupants, and this changes the auction price. Using data from the Osaka District Court, we empirically find that the existence of occupants in properties reduces the auction price through two channels.     

Field experiments on the effects of reserve prices in auctions: more Magic on the Internet

I present experimental evidence on the effects of minimum bids in first‐price, sealed‐bid auctions. The auction experiments manipulated the minimum bids in a preexisting market on the Internet for collectible trading cards from the game Magic: the Gathering. I examine a number of outcomes, including the number of participating bidders, the probability of sale, the levels of individual bids, and the auctioneer's revenues. The benchmark theoretical model is one with symmetric, risk‐neutral bidders with independent private values. The results verify a number of the predictions concerning equilibrium bidding. Many bidders behave strategically, anticipating the effects of the reserve price on others' bids.