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Demand Reduction and Preemptive Bidding in License Auctions

Author

Listed:
  • Randolph Sloof
  • Jacob K. Goeree
  • Theo Offerman

Abstract

Multi-license ascending auctions have been criticized because they allow bidders to reduce their demand and split the market at low prices. At the same time, it has been argued that the ascending auction is a suitable format for a seller who wants to exploit preemptive motives. Incumbent firms may bid above their use values in a coordinated attempt to keep the weak entrant(s) out of the market. This process may boost revenue. In this paper, we look at environments where demand reduction and preemptive bidding are both supported as equilibrium of the ascending auction. In a series of experiments, we compare the performance of the ascending auction with the first-price auction. We observe many instances of strategic demand reduction in the ascending auction, even when entry by the newcomer leads to strong negative effects for the incumbents. As a result, the ascending auction is outperformed by the first-price auction, both in terms of revenue and in terms of efficiency.

Suggested Citation

  • Randolph Sloof & Jacob K. Goeree & Theo Offerman, 2004. "Demand Reduction and Preemptive Bidding in License Auctions," 2004 Meeting Papers 394, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:394
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    Cited by:

    1. Goeree, Jacob K. & Offerman, Theo & Schram, Arthur, 2006. "Using first-price auctions to sell heterogeneous licenses," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 555-581, May.

    More about this item

    Keywords

    auctions; demand reduction; preemptive bidding; experiment;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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