Procurement auctions with entry of bidders

In procurement auctions with a fixed number of bidders there is a tradeoff between cost efficiency and rent extraction. An optimal mechanism, therefore, entails distortions of effort (Laffont and Tirole, 1987). If potential suppliers must sink an entry investment before they can participate in the auction, then decreasing the firms' rent may imply reduced entry. We show that if potential bidders are uninformed before entry, commitment to a plain, nondistortive auction is optimal. In contrast, if potential bidders learn all their private information before entry, the optimal mechanism entails the same distortions as in Laffont and Tirole's static model.     

Raising rivals’ cost in multi-unit auctions

The objective many telecom regulators want to achieve when they decide to auction spectrum is that acquiring firms pay a market price (based on the opportunity cost principle). The simultaneous ascending auction may fail in this respect, as it provides bidders with an opportunity to engage in strategic demand reduction. This paper asks whether the combinatorial clock auction (CCA) fares better in this respect. We show that the answer to this question depends on the objectives bidders have. If bidders have only the slightest preference to raise rivals’ cost, they will use the opportunities the CCA provides them to engage in strategic demand expansion. This is even the case when the clock phase ends with excess demand.     

Supply function equilibria with capacity constraints and pivotal suppliers

The concept of a supply function equilibrium (SFE) has been widely used to model generators' bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm's rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not fully considered the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform-price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform-price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.     

Synergistic valuations and efficiency in spectrum auctions

In spectrum auctions, bidders typically have synergistic values for combinations of licenses. This has been the key argument for the use of combinatorial auctions in the recent years. Considering synergistic valuations turns the allocation problem into a computationally hard optimization problem that generally cannot be approximated to a constant factor in polynomial time. Ascending auction designs such as the Simultaneous Multiple Round Auction (SMRA) and the single-stage or two-stage Combinatorial Clock Auction (CCA) can be seen as simple heuristic algorithms to solve this problem. Such heuristics do not necessarily compute the optimal solution, even if bidders are truthful. We study the average efficiency loss that can be attributed to the simplicity of the auction algorithm with different levels of synergies. Our simulations are based on realistic instances of bidder valuations we inferred from bid data from the 2014 Canadian 700 MHz auction. The goal of the paper is not to reproduce the results of the Canadian auction but rather to perform “out-of-sample” counterfactuals comparing SMRA and CCA under different synergy conditions when bidders maximize payoff in each round. With “linear” synergies, a bidder's marginal value for a license grows linearly with the total number of licenses won, while with the “extreme national” synergies, this marginal value is independent of the number of licenses won unless the bidder wins all licenses in a national package. We find that with the extreme national synergy model, the CCA is indeed more efficient than SMRA. However, for the more realistic case of linear synergies, SMRA outperforms various versions of CCA that have been implemented in the field including the one used in the Canadian 700 MHz auction. Overall, the efficiency loss of all ascending auction algorithms is small even with high synergies, which is remarkable given the simplicity of the algorithms.     

A binary solution method for the multi-product newsboy problem with budget constraint

Multi-product newsboy problem (MPNP) with budget constraint is a classical inventory control/management problem. However, solution methods for MPNP under general demand distributions are limited in the current literature. In this paper, by analyzing properties of the optimal solution to the MPNP with a budget constraint, we develop a solution algorithm for the constrained MPNP. The proposed algorithm is binary in nature, and is applicable to general types of demand distribution functions, discrete as well as continuous. For continuous demand distribution function, our approach can obtain the optimal or near optimal solution to the constrained MPNP with polynomial computation complexity of the o(n) order. On the other hand, for discrete demand distribution functions, it can effectively provide good approximate solution. Numerical experiments are presented to show the performance of our method.     

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.     

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.     

Competition in a Dynamic Auction Market: Identification,Structural Estimation,and Market Efficiency

The model incorporates an infinite series of auctions for identical items (or close substitutes) ordered over time and bidders with unit demand. The participants of each auction are drawn from a dynamic pool, with losing bidders remaining in the pool of potential bidders. The number of bidders in each auction is unobservable. Risk‐neutral, forward‐looking bidders submit bids below valuation. A novel identification and estimation strategy is used to estimate the valuation distribution from an order statistic of the bids. The model is used to evaluate the efficiency of online auctions for a 60GB Apple iPod Video, compared to a perfect‐competition benchmark.     

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.     

OPTIMAL AUCTIONS WHEN A SELLER IS BOUND TO SELL TO COLLUSIVE BIDDERS*

I consider optimal auctions for a seller who is bound to sell a single item to one of two potential buyers, organized in a ‘well‐coordinated’ cartel. I show that, even though the seller cannot deter collusion, he can optimally accommodate it by employing a simple mechanism which imposes an inefficient allocation on the bidders unless they pay a sufficiently high amount to avoid it.     

Asymmetric Cost Pass-Through in Multi-Unit Procurement Auctions: An Experimental Approach*

We explore input cost pass-through in multi-unit procurement auctions. Whether cost shocks are private versus common across firms has important implications for discriminatory, but not uniform price auctions. We provide evidence of asymmetric pass-through of private cost shocks in discriminatory auctions. Unlike uniform price auctions, revenue-maximizing bidders in discriminatory auctions ‘pad’ bids close to the expected clearing price for units with costs below that price, but they do not bid below cost on higher cost units. Therefore, if costs are higher than expected, the clearing price rises and if costs are lower than expected, the clearing price remains high.     

Optimal sequential auctions

Sequential sealed first-price and open descending-price procurement auctions are studied. We examine which procurement auction rule achieves the low procurement cost. We show that the answer to this policy question depends on whether the items are complements or substitutes. With substitutes, the first-price procurement auction is preferred, while with complements, the open descending-price procurement auction is preferred. We also illustrate the procurement cost minimizing auction and the auction rule preferred by the bidders. With substitutes, bidders prefer the open descending-price procurement auction, while with complements bidders prefer the first-price procurement auction.     

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.     

Auction hosting site pricing and market equilibrium with endogenous bidder and seller participation

This paper characterizes the payoffs and pricing policies of auction hosting sites when both the bidders’ and the sellers’ participation is endogenous. Sellers have heterogeneous opportunity costs and make a listing decision depending on the listing fee and the expected revenue from the sale. On the other side of the market, factors such as facility in navigating an interface layout and prior bidding experience result in bidder heterogeneity with respect to participation costs. Bidders participate if their ex ante expected payoff from searching the site exceeds their participation costs. The auction site earns revenue by setting positive listing fees, trading off the increased revenue per seller resulting from a higher fee with the revenue reduction from the loss of sellers. Though this appears to be a classic monopoly problem, there are important differences. The reduction in the number of sellers participating in a site has feedback effects, as it affects the number of bidders who choose to visit that site, which in turn again affects the attractiveness of the site to sellers, and thus further reduces seller participation. In this environment the monopolist’s ability to extract rents is severely limited, even if one considers rent extraction from the seller side of the market only. It is demonstrated that the inverse demand curve is flatter than the demand curve obtained from the (inverse) distribution of seller costs. Moreover, the inverse demand curve has at least one and possibly multiple flat segments, leading to discontinuities in the profit function. Thus, small changes in the environment can lead to large changes in the optimal fee and market participation.     

Solving the Winner Determination Problem in a Divisible-Object Auction

In an auction of a divisible object, bidders' demand functions are often assumed to be nonincreasing, meaning that bidders are willing to pay less or the same price for every additional unit. Under this assumption, the optimal allocation that maximizes the auctioneer's revenue can be found using a greedy-based procedure. This article argues that situations may arise where a bidder may need to express her preferences through a nondecreasing demand function; when such a bidder is present in the auction, the greedy-based procedure does not guarantee the optimal allocation. Thus, this article proposes a mixed integer program that finds the optimal allocation in a divisible-object auction at which bidders submit their bids as arbitrary stepwise demand functions. The practical aspect of the mathematical program is presented by means of a simple yet illustrative example in a treasury bond auction setting. The results of the auctioneer's revenue are reported as a function of the number of bidders with nonincreasing and nondecreasing demand functions.     

Selective entry and auction design

This article examines how different auction designs perform when entry is endogenous and selective, by which we mean that bidders with higher values are more likely to enter. In a model where potential bidders are symmetric, we show that three alternative designs can significantly outperform the ‘standard auction with simultaneous and free entry’ when entry is selective. When bidders are asymmetric, we show that level of bid preference that maximizes a seller’s revenues is significantly affected by the degree of selection. We also describe recent empirical and econometric work that shows that the degree of selection can be identified and estimated using standard types of auction data.     

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.     

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.      

Information disclosure in optimal auctions

This paper analyzes a situation in which the seller controls the accuracy of what potential buyers learn about their valuation of a good to be sold. This setting is related to many real situations such as home sales, antique auctions, and digital platforms such as Google and Facebook selling online advertising slots. Two important questions arise: what is the optimal selling mechanism, and what is the optimal disclosure policy of the seller. Under the assumption of private values, a simple auction with a reserve price is the optimal mechanism. What we show is that the amount of (costly) information provided increases with the number of potential bidders when using the optimal mechanism and is greater than when the object is always sold. Because information changes the distribution of a bidder’s expected valuations, the optimal reserve price also changes, so that the number of bidders (indirectly) affects the reserve price. We show that as the number of bidders increases, the optimal reserve price becomes more restrictive.     

Should auctioneers supply early information for prospective bidders?

Consider an auction in which potential bidders must sink an entry investment before learning their values, but where the auction designer can release information so that the bidders learn their values before entry. Such early information will induce screening of high-value bidders, and it will give rise to information rents and thereby a difference between the socially optimal auction and the auctioneer's preferred mechanism. Therefore, the auction designer has too weak an incentive to produce early information. Early information may increase or reduce equilibrium entry. If entry is sufficiently reduced, early information will harm the auction designer.