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Divisible-Good Auctions: The Role of Allocation Rules

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Author Info

  • Ilan Kremer

    ()
    (Stanford University)

  • Kjell G. Nyborg

    ()
    (University of California, Los Angeles, London Business School, and Centre for Economic Policy Research)

Abstract

We examine the role of allocation rules in determining the set of equilibrium prices in uniform-price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 1 (Spring)
Pages: 147-159

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Handle: RePEc:rje:randje:v:35:y:2004:1:p:147-159

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Cited by:
  1. Chernov, Mikhail & Gorbenko, Alexander & Makarov, Igor, 2011. "CDS Auctions," CEPR Discussion Papers 8456, C.E.P.R. Discussion Papers.
  2. Alcalde, José & Matthias, Dahm, 2011. "Competition for Procurement Shares," QM&ET Working Papers 11-3, Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica.
  3. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2005. "Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions," Journal of Finance, American Finance Association, vol. 60(4), pages 1865-1902, 08.
  4. Luciano De Castro, 2012. "Correlation of Types in Bayesian Games," Discussion Papers 1556, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Paul Milgrom, 2008. "Assignment Messages and Exchanges," Discussion Papers 08-014, Stanford Institute for Economic Policy Research.
  6. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
  7. Bourjade, Sylvain, 2009. "Strategic price discounting and rationing in uniform price auctions," Economics Letters, Elsevier, vol. 105(1), pages 23-27, October.
  8. Martin Sefton & Ping Zhang, 2009. "Divisible-good uniform price auctions: the role of allocation rules and communication among bidders," Discussion Papers 2009-21, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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