Do hybrid auctions always give “the best of both worlds” ? An illustration from asymmetric Anglo–Dutch auctions

The Anglo–Dutch auction of Klemperer (European Economic Review 42(3):757–69, 1998) is the unit-demand precursor of the many two-stage hybrid auctions currently used for the allocation of high value goods such as mobile telephony licenses, bus routes, and public procurement. This breadth of practical applications has been largely matched by an absence of theoretical results regarding the performance of hybrid auctions relative to their simpler component counterparts: the ascending and first-price auctions. To address this imbalance, I analyse an asymmetric discrete private value model that allows a complete revenue ranking between the Anglo–Dutch, ascending and first-price auctions. I find that the Anglo–Dutch auction can revenue-dominate for a small set of parameters, and ranks revenue-last in an even smaller number of cases; for most parameter values it ranks as intermediate. The auction also performs particularly well when bidders face entry costs and the incumbent has small-but-certain value-advantage: a setting where bidder incentives are similar to Klemperer’s notion of “almost common values”. Overall, the Anglo–Dutch auction is rarely best, but even more rarely performs worst—for this reason, it may be a prudent policy choice if the auctioneer is unsure about the magnitude of asymmetries across bidders. While the implications of my basic model do not immediately generalise to more complex settings, they do suggest that the notion that hybrid auctions are naturally “the best of both worlds” need to be evaluated carefully, and cannot be taken for granted.