Multi‐round procurement auctions with secret reserve prices: theory and evidence

Abstract

When a secret reserve price is used in an auction, the auctioneer cannot guarantee that the good can be sold out at the auction, and can re-auction the unsold objects in the next round.Motivated by this interesting feature observed in the procurement auctions organized by the Indiana Department of Transportation, we construct a bidding model in multi-round procurement auctions with secret reserve prices and evaluate how the release of the auctioneer's reserve price a¤ects bidders'bidding behavior and the auctioneer's expected payment. Our theoretical model predicts that the equilibrium bids uniformly decline over stages, and the numerical analysis of our model indicates that hiding the reserve price may be better than announcing it for the auctioneer under some speci…cations of underlying distributions. We develop an empirical model to recover the unknown structutral parameters and to conduct counterfactual analyses.We thank M. Baye, E. Bond, A. Daughety, Y. Fan, J. Levin and J. Reinganum for their comments and suggestions.We also thank

The impact of reserve prices on the perceived bias of expert appraisals of fine art

“…However, many types of goods are auctioned subject to secret reserves, including oil and gas leases, timberland, construction contracts, and wine—in addition to fine art. Empirical studies of auctions with secret reserves, for example Elyakime et al (1997) and Ji and Li (2008), have so far been limited to situations where the reserve price is ultimately revealed—before the model is empirically estimated. Our research extends the econometric analysis of auctions into the realm of an unknown and unobservable reserve.…”

“…10 10 Ji and Li (2008), in contrast, assume that the distribution of the unknown reserve is exponential.…”

Structural Econometric Methods in Auctions: A Guide to the Literature

“…They concluded that the first effect explained above dominates the second effect, thus leading to an increase in firms' costs. Ji and Li (2008a) exploited a multi-round feature of procurement auctions conducted by the Indiana Department of Transportation. Specifically, if a contract is not awarded (perhaps because all bids exceed a price ceiling in a low-price setting) the government may re-auction the contract in additional rounds.…”

Secret reserve prices by uninformed sellers

“…Elyakime, Laffont, Loisel, and Vuong (1994) and Eklöf and Lunander (2003) argue that while public reserve prices may be optimal, secret reserve prices yield higher sales, which benefits the auctioneer when paid a percentage of sales. Ji and Li (2008) study multiround auctions with a secret reserve price and find via numerical simulations that a secret reserve price can yield lower expected procurement costs than a public reserve price, when the mean of bidders' cost distribution exceeds the mean reserve price.…”