Demand reduction and preemptive bidding in multi-unit license auctions

Abstract

Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while entrants' chances are similar across the two formats. Abstract Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and e¢ ciency, while entrants'chances are similar across the two formats.JEL classi…cation: D44, D45, C91

Divisible-good uniform price auctions: The role of allocation rules and communication among bidders

“…In general, collusive bidding is rarely observed in experimental uniform price sealed bid auctions. 3 The evidence suggests collusion is only achievable if there are two bidders (Sherstyuk (2008); Kwasnica and Sherstyuk (2007)), subjects have a coordination device (Brown, Plott and Sullivan, 2009;Li and Plott, 2009), anonymity is abandoned (Füllbrunn and Neugebauer, 2007), auctions are open format (Goeree, Offerman and Sloof (2006), Burtraw et al (forthcoming)), or bidders are allowed to communicate prior to bidding (Goswami, Noe and Rebello, 1996).…”

Auction Format and Auction Sequence in Multi‐item Multi‐unit Auctions: An Experimental Study

“…(), as well as Goeree et al . () provide experimental evidence of lower revenues and prices in clock auctions compared to other auction formats . These experiments, though, were specifically designed to study collusion and featured not only a low number of bidders; the experimental instructions in both Holt et al .…”

“…With respect to the pricing rule, the theoretical and empirical literature seems to agree that permit auctions should apply uniform pricing as used in most emissions trading schemes such as the European Union Trading Scheme, the Swiss Emissions Trading Scheme, the US Regional Greenhouse Gas Initiative (RGGI), the California Cap-and-Trade Program, and the US NO x schemes (see also Ockenfels, 2009, for a discussion). Some experimental laboratory studies on emission permits support this view (Cason and Plott, 1996;Porter et al, 2009) while others do not find uniform price auctions to perform superiorly (Shobe et al, 2010;Goeree et al, 2013).…”

Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection

“…4 Later experiments introduced other auction mechanisms and compared their success in deterring collusion in different environments. Several studies found that, even without communication or side payments, an ascending bid mechanism results in more collusion than uniform or discriminatory sealed bid mechanisms in multi-unit auctions (Alsemgeest et al, 1998;Burtraw et al, 2009;Goeree et al, 2013;Kwasnica and Sherstyuk, 2007). Agranov and Yariv (2014) compared first-price and second-price auctions with unstructured communication and side payments, using a stranger design to rule out bid rotation.…”