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Synergies are a reason to prefer first-price auctions!

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  • Leufkens, Kasper
  • Peeters, Ronald

Abstract

In this paper we show that in a private value setting first-price auctions can be preferred to second-price auctions. We consider a sequential auction of two objects with positive synergies and compare both auction formats. Although the second-price auction performs better in terms of efficiency and revenue, the first-price auction performs much better on a so far neglected dimension. Namely, the probability that the winner of the first object goes bankrupt is almost always higher when using the second-price rule. Our findings therefore support the common use of first-price auctions, most notably for procurement.
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  • Leufkens, Kasper & Peeters, Ronald, 2007. "Synergies are a reason to prefer first-price auctions!," Economics Letters, Elsevier, vol. 97(1), pages 64-69, October.
  • Handle: RePEc:eee:ecolet:v:97:y:2007:i:1:p:64-69
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    1. Rothkopf, Michael H & Teisberg, Thomas J & Kahn, Edward P, 1990. "Why Are Vickrey Auctions Rare?," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 94-109, February.
    2. Plum, M, 1992. "Characterization and Computation of Nash-Equilibria for Auctions with Incomplete Information," International Journal of Game Theory, Springer;Game Theory Society, vol. 20(4), pages 393-418.
    3. Menezes, Flavio M. & Monteiro, Paulo K., 2004. "Auctions with synergies and asymmetric buyers," Economics Letters, Elsevier, vol. 85(2), pages 287-294, November.
    4. Branco, Fernando, 1997. "Sequential auctions with synergies: An example," Economics Letters, Elsevier, vol. 54(2), pages 159-163, February.
    5. Leufkens, Kasper & Peeters, Ronald & Vermeulen, Dries, 2010. "Sequential auctions with synergies: The paradox of positive synergies," Economics Letters, Elsevier, vol. 109(3), pages 139-141, December.
    6. Thomas D. Jeitschko & Elmar Wolfstetter, 2002. "Scale Economies and the Dynamics of Recurring Auctions," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 403-414, July.
    7. Tang Sorensen, Soren, 2006. "Sequential auctions for stochastically equivalent complementary objects," Economics Letters, Elsevier, vol. 91(3), pages 337-342, June.
    8. Fehl, Ulrich & Guth, Werner, 1987. "Internal and external stability of bidder cartels in auctions and public tenders: A comparison of pricing rules," International Journal of Industrial Organization, Elsevier, vol. 5(3), pages 303-313.
    9. Eric Maskin & John Riley, 2000. "Asymmetric Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 413-438.
    10. Skrzypacz, Andrzej & Hopenhayn, Hugo, 2004. "Tacit collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 114(1), pages 153-169, January.
    11. Guth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2005. "Bidding behavior in asymmetric auctions: An experimental study," European Economic Review, Elsevier, vol. 49(7), pages 1891-1913, October.
    12. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-445, June.
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