Informational Free Rides in Uniform Price Auctions: Exception or Norm?
Multi-unit common value uniform price auctions with demand function bids are in widespread use. I analyze this auction when there is an informed bidder and other uninformed bidders. In such auctions it is easy to construct equilibria in which uninformed bidders earn a positive payoff by free riding on the informed bidder's information. Here I ask whether such free riding arises only in special cases, and should therefore be considered a pathological exception, or whether it is the norm in equilibrium. To answer this, I derive the necessary and sufficient condition for uninformed bidders to earn a zero payoff in all equilibria. The condition requires that there should be enough demand by uninformed bidders at least at low prices so that no single uninformed bidder is ``pivotal'' in deciding whether total uninformed demand equals or exceeds supply, and places a lower bound on the highest price submitted by the informed bidder (i.e. the highest price at which at least one unit is demanded by the informed bidder). Equilibria not satisfying the condition exist. In these, uninformed bidders appropriate some of the information rent. Further, the condition is quite strong in certain cases, casting doubt on existence of equilibria with zero uninformed payoff. If there is no such equilibrium, informational free riding characterizes all equilibria in uniform price auctions. I discuss application of the results to Treasury auctions as well as repo auctions.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Klemperer, P., 1999.
"Auction Theory: a Guide to the Literature,"
1999-w12, Economics Group, Nuffield College, University of Oxford.
- Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Microeconomics 9903002, EconWPA.
- Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Economics Series Working Papers 1999-W12, University of Oxford, Department of Economics.
- Klemperer, Paul, 1999. "Auction Theory: a Guide to the Literature," CEPR Discussion Papers 2163, C.E.P.R. Discussion Papers.
- Milgrom, Paul & Weber, Robert J., 1982.
"The value of information in a sealed-bid auction,"
Journal of Mathematical Economics,
Elsevier, vol. 10(1), pages 105-114, June.
- Angel Hernando-Veciana, 2000.
"Successful Uninformed Bidding,"
Econometric Society World Congress 2000 Contributed Papers
0791, Econometric Society.
- Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
- Lawrence M. Ausubel & Peter Cramton, 1995.
"Demand Reduction and Inefficiency in Multi-Unit Auctions,"
Papers of Peter Cramton
98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
- Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpmi:0511007. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.