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Combination Bidding in Multi-unit Auctions

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  • Estelle Cantillon
  • Martin Pesendorfer

Abstract

This paper considers the problem of identification and estimation in the first-price multi-unit auction. It is motivated by the auctions of bus routes held in London where bidders submit bids on combinations of routes as well as on individual routes. We show that submitting a combination bid lower than the sum of the bids on the constituent routes does not require cost synergies and can instead serve as a tool to leverage market power across the different routes. As a result, the welfare consequences of allowing combination bidding in the first price auction are ambiguous, and depend on the importance of the cost synergies. We provide conditions for non-parametric identification of the multidimensional private information in the multi-unit first price auction and derive partial identification results when they are not satisfied. We propose an estimation method consisting of two stages: In the first stage, the distribution of bids is estimated parametrically. In the second stage, the (set of) costs and distribution(s) of costs consistent with the observed behavior are inferred based on the first order conditions for optimally chosen bids. We apply the estimation method to data from the London bus routes market. We quantify the magnitude of cost synergies and assess possible efficiency losses arising in this market.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/151705.

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Publication status: Published in: Econometrica
Handle: RePEc:ulb:ulbeco:2013/151705

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Citations

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Cited by:
  1. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.
  2. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers, Stanford University, Department of Economics 02004, Stanford University, Department of Economics.
  3. Patrick Bajari & Jeremy T. Fox, 2005. "Measuring the Efficiency of an FCC Spectrum Auction," NBER Working Papers 11671, National Bureau of Economic Research, Inc.
  4. Estelle Cantillon & Martin Pesendorfer, 2006. "Auctioning bus routes: the London experience," ULB Institutional Repository 2013/9003, ULB -- Universite Libre de Bruxelles.
  5. Paul Milgrom, 2006. "Package Auctions and Package Exchanges: the 2004 Fisher-Schultz Lecture," Levine's Bibliography 321307000000000131, UCLA Department of Economics.
  6. Chow, YuenLeng & Yavas, Abdullah, 2008. "Auctions with Positive Synergies: Experimental Evidence," MPRA Paper 12669, University Library of Munich, Germany.
  7. Park, Sunju & Rothkopf, Michael H., 2005. "Auctions with bidder-determined allowable combinations," European Journal of Operational Research, Elsevier, Elsevier, vol. 161(2), pages 399-415, March.
  8. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
  9. Lawrence M. Ausubel & Paul Milgrom, 2005. "Ascending Proxy Auctions," Levine's Bibliography 122247000000000785, UCLA Department of Economics.
  10. Chernomaz, Kirill & Levin, Dan, 2012. "Efficiency and synergy in a multi-unit auction with and without package bidding: An experimental study," Games and Economic Behavior, Elsevier, Elsevier, vol. 76(2), pages 611-635.
  11. Patrick Bajari & Stephanie Houghton & Steven Tadelis, 2004. "Bidding for Incompete Contracts," Working Papers, Fondazione Eni Enrico Mattei 2004.141, Fondazione Eni Enrico Mattei.
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