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Bidding for the Future

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  • Jacob K. Goeree

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Abstract

This paper considers auctions in which bidders compete for an advantage in future strategic interactions. Examples include bidding for patented innovations that reduce production costs, takeover battles, and the auctioning of licenses to operate in new markets (e.g. the recent spectrum auctions). We show that when bidders have an incentive to exaggerate their private information, equilibrium bids are biased upwards as bidders try to signal via the winning bid. Signaling is most prominent in second-price auctions where equilibrium bids can be "above value," and may diverge to infinity for a strategic improvement everyone agrees is negligible. In English and first-price auctions, signaling is necessarily less extreme as the winning bidder incurs the cost of her signaling choice. Hence there is no strategic equivalence between the second-price and English auction in this independent private-information context (although revenue equivalence holds). In the English auction, the winner increases the winning bid after everyone else has dropped out. The opportunity to signal via the winning bid lowers bidders' expected payoffs and raises the seller's expected revenue, giving sellers an incentive to conceal information they may have about bidders' private valuations. Losers' profits are unaffected by the winner's attempt to signal since, in a separating equilibrium, losers can correctly infer the winner's information from the winning bid. We show that if bidders neglect the information contained in losing, i.e. a loser's curse, they may bid too high and end up winning a position they value much less ex post, a winner's curse. Finally, when bidders wish to understate their private information, a separating equilibrium need not exist. When it exists, however, signaling causes equilibrium bids to be biased downward in first-price and second-price auctions, while signaling is impossible in the English auction, which therefore yields higher revenues in this case.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap346.pdf
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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 346.

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Length: 28 pages
Date of creation: Apr 2000
Date of revision:
Handle: RePEc:vir:virpap:346

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: Auctions; signaling; loser's curse; winner's curse;

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References

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  1. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  2. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  3. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Imperfect Competition: On The Existence Of Equilibrium," Discussion Papers 1989_30, Columbia University, Department of Economics.
  4. 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.
  5. Cramton, Peter C, 1995. "Money Out of Thin Air: The Nationwide Narrowband PCS Auction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 267-343, Summer.
  6. Aoki, Reiko & Reitman, David, 1992. "Simultaneous signaling through investment in an R& D game with private information," Games and Economic Behavior, Elsevier, vol. 4(3), pages 327-346, July.
  7. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  8. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  10. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
  11. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  12. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
  13. Mailath, George J., 1988. "An abstract two-period game with simultaneous signaling--Existence of separating equilibria," Journal of Economic Theory, Elsevier, vol. 46(2), pages 373-394, December.
  14. Mailath, George J, 1989. "Simultaneous Signaling in an Oligopoly Model," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 417-27, May.
  15. Cameron Charles M. & Rosendorff B. Peter, 1993. "A Signaling Theory of Congressional Oversight," Games and Economic Behavior, Elsevier, vol. 5(1), pages 44-70, January.
  16. Avery, Christopher, 1998. "Strategic Jump Bidding in English Auctions," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 185-210, April.
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Citations

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Cited by:
  1. Maarten C.W. Janssen, 2003. "Auctions as Collusion Devices," Tinbergen Institute Discussion Papers 03-017/1, Tinbergen Institute.
  2. Maarten C.W. Janssen & Vladimir A. Karamychev, 2007. "Do Auctions select Efficient Firms?," Tinbergen Institute Discussion Papers 07-001/1, Tinbergen Institute.
  3. Sui, Yong, 2006. "All-pay auctions with resale," MPRA Paper 11463, University Library of Munich, Germany, revised Oct 2007.
  4. Maarten C.W. Janssen & Vladimir A. Karamychev, 2005. "Auctions, Market Prices and the Risk Attitude Effect," Tinbergen Institute Discussion Papers 05-025/1, Tinbergen Institute.

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