Demand Reduction and Inefficiency in Multi-Unit Auctions
AbstractAuctions typically involve the sale of many related goods. The FCC spectrum auctions and the Treasury debt auctions are examples. With conventional auction designs, large bidders have an incentive to reduce demand in order to pay less for their winnings. This incentive creates an inefficiency in multi-unit auctions. Large bidders reduce demand for additional units and so sometimes lose to smaller bidders with lower values. We demonstrate this inefficiency in several auction settings: flat demand and downward-sloping demand, independent private values and correlated values, and uniform pricing and pay-your-bid pricing. We also establish that the ranking of the uniform-price and pay-your-bid auctions is ambiguous. We show how a Vickrey auction avoids this inefficiency and how the Vickrey auction can be implemented with a simultaneous, ascending-bid design (Ausubel 1997). Bidding behavior in the FCC spectrum auctions illustrates the incentives for demand reduction and the associated inefficiency.
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Bibliographic InfoPaper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 98wpdr.
Length: 31 pages
Date of creation: 08 Nov 1995
Date of revision: 22 Jul 2002
Note: Working Paper
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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
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Web page: http://www.cramton.umd.edu
Auctions; Multi-Unit Auctions; Spectrum Auctions; Treasury Auctions;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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