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Informational Free Rides in Uniform Price Auctions: Exception or Norm?

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Author Info
Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck)

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Abstract

Multi-unit common value uniform price auctions with demand function bids are in widespread use. I analyze this auction when there is an informed bidder and other uninformed bidders. In such auctions it is easy to construct equilibria in which uninformed bidders earn a positive payoff by free riding on the informed bidder’s information. Here I ask whether such free riding arises only in special cases, and should therefore be considered a pathological exception, or whether it is the norm in equilibrium. To answer this, I derive the necessary and sufficient condition for uninformed bidders to earn a zero payoff in all equilibria. The condition requires that there should be enough demand by uninformed bidders at least at low prices so that no single uninformed bidder is “pivotal” in deciding whether total uninformed demand equals or exceeds supply, and places a lower bound on the highest price submitted by the informed bidder (i.e. the highest price at which at least one unit is demanded by the informed bidder). Equilibria not satisfying the condition exist. In these, uninformed bidders appropriate some of the information rent. Further, the condition is quite strong in certain cases, casting doubt on existence of equilibria with zero uninformed payoff. If there is no such equilibrium, informational free riding characterizes all equilibria in uniform price auctions. I discuss application of the results to Treasury auctions as well as repo auctions.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0521.pdf
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0521.

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Date of creation: Nov 2005
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Handle: RePEc:bbk:bbkefp:0521

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Related research
Keywords: Uniform price auction; demand function bids; market clearing price; informational free riding; Treasury auctions; repo auctions;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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  1. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April. [Downloadable!] (restricted)
  2. Hernando-Veciana, Angel, 2004. "Successful uninformed bidding," Games and Economic Behavior, Elsevier, vol. 48(1), pages 29-53, July. [Downloadable!] (restricted)
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  3. Klemperer, P., 1999. "Auction Theory: a Guide to the Literature," Economics Papers 1999-w12, Economics Group, Nuffield College, University of Oxford.
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  4. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002. [Downloadable!]
  5. Paul Milgrom & Robert J. Weber, 1981. "The Value of Information in a Sealed-Bid Auction," Discussion Papers 462, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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