Impacts of a Capacity Advantaged Bidder in Sequential Common Value Auctions: Evidence from the Laboratory

As bidders reach capacity throughout a sequential common value auction, theory predicts they will account for the option value of purchasing later units against fewer rivals. Mergers, joint purchasing arrangements, or a common bidding agent may result in a capacity advantaged bidder. Using laboratory experiments, we find that bidders account for the option value of winning later units when capacity constraints are significantly binding. Similar to the predictions of value advantaged bidder theory, the capacity advantaged bidder bids more aggressively, purchasing more units at lower prices than disadvantaged rivals. However, the creation of a capacity advantaged bidder transfers surplus to all bidders primarily due to the reduction in the number of bidders.