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Auctions, aftermarket competition, and risk attitudes

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  • Janssen, Maarten C.W.
  • Karamychev, Vladimir A.

Abstract

With the experience of the sequence of UMTS auctions held worldwide in mind, we consider a situation where firms participate in license auctions to compete in an aftermarket. It is known that when a monopoly right is auctioned, auctions select the bidder that is least risk-averse. This firm will choose a higher value of the aftermarket strategic variable than any other firm will do, thereby implying a higher market price under price setting behavior and a lower price due to higher quantity under quantity-setting behavior. This paper extends the analysis to oligopoly aftermarkets and analyzes whether the monopoly result carries over to oligopoly settings. We argue that with multiple licenses and demand uncertainty auctions actually perform even worse from a welfare point of view than the monopoly case would suggest. A strategic effect strengthens the monopoly result with respect to prices, but weakens the result with respect to quantities.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 2 (March)
Pages: 274-285

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Handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:274-285

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Auctions Aftermarkets Risk attitudes Selection;

References

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  1. Jehiel, Philippe & Moldovanu, Benny, 2005. "Allocative and Informational Externalities in Auctions and Related Mechanisms," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 142, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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  8. Hakenes, Hendrik & Schnabel, Isabel, 2000. "License Auctions and Market Structure," Sonderforschungsbereich 504 Publications 01-21, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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  13. Maarten C.W. Janssen & Vladimir A. Karamychev, 2005. "Auctions, Market Prices and the Risk Attitude Effect," Tinbergen Institute Discussion Papers 05-025/1, Tinbergen Institute.
  14. Das Varma, Gopal, 2003. "Bidding for a process innovation under alternative modes of competition," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 15-37, January.
  15. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  16. Jehiel, Phillipe & Moldovanu, Benny, 1997. "Auctions with Downstream Interaction among Buyers," Sonderforschungsbereich 504 Publications 97-06, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  17. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
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Cited by:
  1. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Can competition reduce quality?," Discussion Paper Series in Economics 9/2012, Department of Economics, Norwegian School of Economics.
  2. Janssen, Maarten C.W. & Karamychev, Vladimir A. & Maasland, Emiel, 2011. "Auctions with flexible entry fees: A note," Games and Economic Behavior, Elsevier, vol. 72(2), pages 594-601, June.

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