The Favored but Flawed Simultaneous Multiple-Round Auction

We compare the first-price sealed-bid (FPSB) auction and the simultaneous multiple- round auction (SMRA) in an environment based on the planned sale of 900 MHz spectrum in Australia. Three bidders compete for five indivisible items. Bidders are permitted to obtain at most three items and need to obtain at least two to achieve profitable scale, i.e. items are complements. Value complementarities, which are a common feature of spectrum auctions, exacerbate the �fitting problem� and undermine the usual logic for superior price discovery in the SMRA. With substitutes, bidders reduce demands as prices rise and a tatonnement-like dynamic produces market-clearing prices. With complements, however, all that bidders may be interested in at higher prices are larger packages. In addition, the SMRA assigns provisional winners each round, which exposes bidders to the risk of losses when they win only a subset of their desired package. We find that the FPSB outperforms the SMRA across a range of bidding environments: in terms of efficiency, revenue, and protecting bidders from losses due to the exposure problem. Moreover, the FPSB exhibits superior price discovery in that it almost always results in competitive (�core�) prices unlike the SMRA, which frequently produces prices that are too low because of demand-reduction or too high because of the exposure problem. We demonstrate the robustness of our findings by considering two-stage variants of the FPSB and SMRA as well as environments in which bidders know their own values but not the distributions from which values are drawn.