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Auctions, Market Prices and the Risk Attitude Effect

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Author Info
Maarten C.W. Janssen () (Faculty of Economics, Erasmus Universiteit Rotterdam)
Vladimir A. Karamychev (Faculty of Economics, Erasmus Universiteit Rotterdam)

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Abstract

This paper develops one possible argument why auctioning licenses to op- erate in an aftermarket may lead to higher prices in the aftermarket compared to a more random allocation mechanism. Key ingredients in the argument are differences in firms' risk attitudes and the fact that future market prof- its are uncertain so that winning an auction is like winning a lottery ticket. li one license is auctioned, auctions select the firm that is least risk averse. This is what we call the risk attitude effect. Firms that are less risk averse tend to set higher prices (or higher quantities in case quantity is the decision variable) in the marketplace than an average firm. When multiple licenses are auctioned, this conclusion gets strengthened when there is a differenti- ated Eertrand oligopoly in the marketplace. In case of Cournot competition, a strategic effect works against the risk attitude effect so that under certain conditions the more risk averse firms will be selected leading (again) to higher market prices.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-025/1.

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Date of creation: 23 Feb 2005
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Handle: RePEc:dgr:uvatin:20050025

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Related research
Keywords: Auctions; Risk Attitude; Aftermarkets;

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

References listed on IDEAS
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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  2. Jacob K. Goeree, 2000. "Bidding for the Future," Virginia Economics Online Papers 346, University of Virginia, Department of Economics. [Downloadable!]
  3. van Damme, Eric, 2002. "The European UMTS-auctions," European Economic Review, Elsevier, vol. 46(4-5), pages 846-858, May. [Downloadable!] (restricted)
  4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February. [Downloadable!] (restricted)
  5. Ken Binmore & Paul Klemperer, 2001. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses," Economics Papers 2002-W4, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001. [Downloadable!]
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  6. Péter Esö & Lucy White, 2004. "Precautionary Bidding in Auctions," Econometrica, Econometric Society, vol. 72(1), pages 77-92, 01. [Downloadable!] (restricted)
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  7. Damme, E. van, 2002. "The European UMTS-auctions," Discussion Paper 100, Tilburg University, Center for Economic Research. [Downloadable!]
  8. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June. [Downloadable!] (restricted)
  9. McMillan, John, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-62, Summer. [Downloadable!] (restricted)
  10. Philippe Jehiel & Benny Moldovanu, 2000. "Auctions with Downstream Interaction Among Buyers," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 768-791, Winter.
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  11. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September. [Downloadable!] (restricted)
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  12. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June. [Downloadable!] (restricted)
  13. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter. [Downloadable!] (restricted)
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  14. Theo Offerman & Jan Potters, 2000. "Does Auctioning of Entry Licenses affect Consumer Prices? An Experimental Study," Tinbergen Institute Discussion Papers 00-046/1, Tinbergen Institute. [Downloadable!]
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  15. Philippe Jehiel & Benny Moldovanu, 1996. "Strategic Nonparticipation," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 84-98, Spring. [Downloadable!] (restricted)
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  16. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September. [Downloadable!] (restricted)
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  17. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
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  18. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and its Applications," De Economist, Springer, vol. 154(2), pages 197-249, June. [Downloadable!] (restricted)
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