Systematic Price Differences Between Successive Auctionsare no Anomaly

Abstract

Identical cases of wine are often auctioned one immediately after another. Ashenfelter (1989) reports that on average, the later lots fetch less. Such a systematic price difference seems anomalous, the more so because it is shown here that rational expectations imply not equal, but rising, prices. Risk aversion is an obvious way of reconciling the evidence with rational behavior. There is an alternative explanation. The auctions observed by Ashenfelter involved a buyer's option, whereby the first‐round winner could purchase further cases at the same price. It is shown that this feature may both account for the observed price trajectory and raise seller revenue.

First-price equilibrium and revenue equivalence in a sequential procurement auction model

“…Inspired by Ashenfelter's (1989) observation of declining prices in wine auctions where identical cases were sold one after the other, part of the literature aimed at deriving a theoretical explanation for the violation of the "law of one price" that the has been dubbed "declining price anomaly" ever since. 2 For example McAfee and Vincent (1993) explain it by risk averse bidders, Black and De Meza (1992) show that a winner's option to buy further objects at the same price leads to decreasing prices and Bernhardt and Scoones (1994) and Engelbrecht-Wiggans (1994) derive a falling price trend by assuming stochastically equivalent objects. While recent work suggests that strategic behavior in an auction sequence is a driving force for this anomaly, Deltas and Kosmopoulou (2004) demonstrate that part of the overall effect cannot be explained by strategic considerations.…”

Sequential Auctions with Information About Future Goods

“…When bidders demand more than one identical unit of the same good and have diminishing marginal utility, Black and de Meza (1992) and Katzman (1999) describe equilibria in which even multi-unit-demand bidders will make their first-stage bids contingent only on their valuations of the first unit. 3 In contrast, the bidders in the proposed equilibrium always base their first-stage bids on both valuations.…”

“…The received theory of sequential auctions for substitutes focuses either on auctions of several identical units of a good (Milgrom and Weber 2000, Black and de Meza 1992, Katzman 1999 or on auctions of heterogeneous goods without information about future goods (Engelbrecht-Wiggans 1994, Jofre-Bonet andPesendorfer 2003). When bidders demand more than one identical unit of the same good and have diminishing marginal utility, Black and de Meza (1992) and Katzman (1999) describe equilibria in which even multi-unit-demand bidders will make their first-stage bids contingent only on their valuations of the first unit.…”

Bidding at Sequential First-price Auctions with(out) Supply Uncertainty: A Laboratory Analysis

“…This framework is also simple enough to allow for extensions regarding the seller's optimal policy about the release or withholding of information about supply (Pezanis-Christou, 1996) or to check the effects of the arrival of new information about supply during the course of a sequence (Jeitschko, 1999). Burguet and Sákovicz (1997) consider a similar framework for second-price auctions in which buyers are also uncertain about total demand, which is technically equivalent to assuming the existence of a buyer's option as in Black and De Meza (1992).…”

“…We consider the benchmark model for sequential auctions of Milgrom and Weber (1982) that assumes private-independent values and unit-demands. A well-known result of this model is that if k identical units are sold one after the other to n risk neutral bidders, then the resulting series of expected prices is constant if buyers are certain about k. A large body of subsequent research on sequential auctions stems from Ashenfelter's (1989) observation of a 'declining price anomaly' at wine auctions, and has characterized conditions on buyers ' preferences (e.g., von der Fehr, 1994, Engelbrecht-Wiggans, 1994, Bernhardt and Scoones, 1994, Ginsburgh, 1998 or on market specifics to observe deviations from the Lawof-One-Price (e.g., Ashenfelter and Genesove, 1990, Black and De Meza, 1992, Menezes, 1993, Gale and Hausch, 1994, Beggs and Graddy, 1995, Gandal, 1998, Katzman, 1999. McAfee and Vincent (1993) show that for the benchmark model of Milgrom and Weber (1982), expected prices would decline and an efficient allocation of goods can be guaranteed only if buyers display non-decreasing absolute risk averse (NDARA) preferences, which is not considered to be a plausible assumption for real-world behavior.…”