CIRJE-F-1096 "Epic Fail: How Below-Bid Pricing Backfires in Multiunit Auctions"
Author Name Laksá, Sanna, Daniel Marszalec and Alexander Teytelboym
Date October 2018
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Ascending (or second-price) and uniform-price multiunit auctions have appealing theoretical properties if bidders are symmetric and bid competitively. However, auc- tion designers have long been skeptical about their use in practice. First, asymmetries due to value advantage in ascending (or second-price) auctions with a large common-value component can generate asymmetric equilibria with low revenues. Second, both ascending and uniform auctions are susceptible to collusion. Sequential ascending auctions make it especially easy to form and coordinate bidding rings. Third, uniform auctions are susceptible to low-price equilibria in which bidders can commit to coordinate on high bids for initial units and low bids for final, price-setting units in equilibrium—what we call crank-handle bidding. All three of these patterns have been observed separately in certain settings among sophisticated and experienced bidders. We document what we believe is the first case of all three of these phenomena happen- ing among the same, inexperienced bidders across related auctions for fishing quota in Faroe Islands. Our findings indiciate that the underperformance of ascending and uniform-price auctions are not just theoretical curiosities, but a pervasive phenomenon in practical auction design. We suggest straightforward improvements to auction design that could have mitigated these problems.