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Discrete Bids and Empirical Inference in Divisible Good Auctions

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  • Jakub Kastl

Abstract

I examine a model of a uniform price auction of a perfectly divisible good with private information in which the bidders submit discrete bidpoints rather than continuous downward sloping demand functions. I characterize necessary conditions for equilibrium bidding. The characterization reveals a close relationship between bidding in multiunit auctions and oligopolistic behaviour. I demonstrate that a recently proposed indirect approach to the revenue comparisons of discriminatory and uniform price auctions is not valid if bid functions have steps. In particular, bidders may bid above their marginal valuation in a uniform price auction. In order to demonstrate that discrete bidding can have important consequences for empirical analysis I use my model to examine a data set consisting of individual bids in uniform price treasury auctions of the Czech government. I propose an alternative method for evaluating the performance of the employed mechanism. My results suggest that the uniform price auction performs well, both in terms of efficiency of the allocation and in terms of revenue maximization. I estimate that the employed mechanism failed to extract at most 3 basis points in terms of the annual yield of T-bills worth of expected surplus while implementing an allocation resulting in almost all the efficient surplus. Failing to account for discreteness of bids would in my application result in overestimating the unextracted revenue by more than 50%. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 3 ()
Pages: 974-1014

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Handle: RePEc:oup:restud:v:78:y:2011:i:3:p:974-1014

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Cited by:
  1. Mar Reguant, 2014. "Complementary Bidding Mechanisms and Startup Costs in Electricity Markets," CESifo Working Paper Series 4811, CESifo Group Munich.
  2. Kastl, Jakub, 2012. "On the properties of equilibria in private value divisible good auctions with constrained bidding," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 339-352.
  3. Holmberg, P. & Newbery, D & Ralph, D., 2008. "Supply Function Equilibria: Step Functions and Continuous Representations," Cambridge Working Papers in Economics 0863, Faculty of Economics, University of Cambridge.
  4. Jakub Kastl & Ali Hortacsu, 2007. "Testing for Common Valuation in Treasury Bills Auctions," 2007 Meeting Papers 222, Society for Economic Dynamics.
  5. Estelle Cantillon & Martin Pesendorfer, . "Combination Bidding in Multi-unit Auctions," ULB Institutional Repository 2013/151705, ULB -- Universite Libre de Bruxelles.
  6. Ollikka, Kimmo & Tukiainen , Janne, 2013. "Central bank liquidity auction mechanism design and the interbank market," Research Discussion Papers 21/2013, Bank of Finland.
  7. Pamela Cardozo, 2013. "Bidders’ Behaviour in Government Securities Auctions: A case study for Colombia," Borradores de Economia 760, Banco de la Republica de Colombia.
  8. Ping Zhang, 2009. "Characterization of Pure Strategy Equilibria in Uniform Price IPO Auctions," Discussion Papers 2009-05, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  9. Monostori, Zoltan, 2013. "Diszkriminatív áras és egyenáras aukciók
    [Discriminatory versus uniform-price auctions]
    ," MPRA Paper 54254, University Library of Munich, Germany, revised Apr 2013.
  10. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," Cowles Foundation Discussion Papers 1562, Cowles Foundation for Research in Economics, Yale University.
  11. Pamela Cardozo, 2013. "Bidders´ Behaviour in Government Securities Auctions: A case study for Colombia," BORRADORES DE ECONOMIA 010501, BANCO DE LA REPÚBLICA.
  12. Estelle Cantillon & Martin Pesendorfer, 2013. "Combination bidding in multi-unit auctions," LSE Research Online Documents on Economics 54289, London School of Economics and Political Science, LSE Library.
  13. Hunt Allcott, 2012. "The Smart Grid, Entry, and Imperfect Competition in Electricity Markets," NBER Working Papers 18071, National Bureau of Economic Research, Inc.
  14. McAdams, David, 2008. "Partial identification and testable restrictions in multi-unit auctions," Journal of Econometrics, Elsevier, vol. 146(1), pages 74-85, September.
  15. Ali Hortacsu & Jakub Kastl, 2008. "Testing for Common Values in Canadian Treasury Bill Auctions," Discussion Papers 07-053, Stanford Institute for Economic Policy Research.

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