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Underpricing and Market Power in Uniform Price Auctions

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  • Ilan Kremer

Abstract

In uniform auctions, buyers choose demand schedules as strategies and pay the same "market clearing" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria. Copyright 2004, Oxford University Press.

Suggested Citation

  • Ilan Kremer, 2004. "Underpricing and Market Power in Uniform Price Auctions," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 849-877.
  • Handle: RePEc:oup:rfinst:v:17:y:2004:i:3:p:849-877
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    File URL: http://hdl.handle.net/10.1093/rfs/hhg051
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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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