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Pricing Rule in a Clock Auction

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Abstract

We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. The size of the inefficiency declines with smaller bid increments. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes bidders to the possibility of losing the auction at a price below the bidder's value. Thus, fear of losing may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser's regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders' fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction.

Suggested Citation

  • Peter Cramton & Pacharasut Sujarittanonta, 2009. "Pricing Rule in a Clock Auction," Papers of Peter Cramton 09prca, University of Maryland, Department of Economics - Peter Cramton, revised 2009.
    • Handle: RePEc:pcc:pccumd:09prca
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    Cited by:

    1. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Discrete clock auctions: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 15(2), pages 309-322, June.
    2. Vieira, Wilson da Cruz, 2015. "Auctioning off Prizes for Agricultural Product Flow under a Policy of Minimum Prices," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 69(4), December.
    3. Yiakoumi, Despina & Rouaix, Agathe & Phimister, Euan, 2022. "Evaluating capacity auction design for electricity: An experimental analysis," Energy Economics, Elsevier, vol. 115(C).
    4. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Fear of losing in a clock auction," Review of Economic Design, Springer;Society for Economic Design, vol. 16(2), pages 119-134, September.
    5. Robert F. Bordley & Elena Katok & L. Robin Keller, 2010. "Honoring Michael H. Rothkopf's Legacy of Rigor and Relevance in Auction Theory: From the Editors," Decision Analysis, INFORMS, vol. 7(1), pages 1-4, March.
    6. Ehrhart, Karl-Martin & Ott, Marion & Abele, Susanne, 2015. "Auction fever: Rising revenue in second-price auction formats," Games and Economic Behavior, Elsevier, vol. 92(C), pages 206-227.

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    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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