98wp-demand-reductio - Demand Reduction and Inefficiency in Multi-Unit Auctions Lawrence M Ausubel and Peter Cramton University of Maryland 27 July

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Demand Reduction and Inefficiency in Multi-Unit Auctions Lawrence M. Ausubel and Peter Cramton* University of Maryland 27 July 2002 (first draft: 8 November 1995) Abstract Auctions typically involve the sale of many related goods. Treasury, spectrum and electricity auctions are examples. In auctions where bidders pay the market-clearing price for items won, large bidders have an incentive to reduce demand in order to pay less for their winnings. This incentive creates an inefficiency in multiple-item auctions. Large bidders reduce demand for additional items and so sometimes lose to smaller bidders with lower values. We demonstrate this inefficiency in an auction model which allows interdependent values. We also establish that the ranking of the uniform-price and pay-as-bid auctions is ambiguous in both revenue and efficiency terms. Bidding behavior in spectrum auctions, electricity auctions, and experiments highlights the empirical importance of demand reduction. JEL No. : D44 (Auctions) Keywords : Auctions, Multi-Unit Auctions, Spectrum Auctions, Treasury Auctions, Electricity Auctions Send comments to: Professors Lawrence M. Ausubel or Peter Cramton Department of Economics University of Maryland College Park, MD 20742-7211 [email protected] [email protected] 301-405-3495 301-405-6987 *The authors gratefully acknowledge the support of the National Science Foundation. We appreciate valuable comments from Preston McAfee, three anonymous referees, and participants at numerous conferences and seminars.
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1 One of the preeminent justifications for auctioning public resources is to attain allocative efficiency. For example, Vice President Al Gore opened the December 1994 Broadband PCS spectrum auction proclaiming, “Now we’re using the auctions to put licenses in the hands of those who value them the most.” 1 Given the emphasis that policymakers place on efficiency, surprisingly little is known by economists about the efficiency properties of various auction designs for multiple items. Most of the conventional wisdom comes by analogy from single-item auctions. We know that the second-price auction and the English auction induce buyers to bid sincerely, implying efficient outcomes (William Vickrey 1961). Under a first-price auction, buyers shade their bids below their values, but efficiency is still possible when symmetric bidders employ symmetric strategies. However, in environments where bidders desire multiple items, general results, beyond those in Vickrey’s original paper, are not well understood. This observation is clearest in the context of U.S. Treasury auctions, where there has been a longstanding debate between two alternatives. The traditional format used for the sale of Treasury securities has been the pay-as-bid auction : bidders each submit bids for various quantities at various prices, the auctioneer determines the market-clearing price, all bids exceeding the market-clearing price are accepted, and bidders pay their winning bids. Milton Friedman (1960) proposed the uniform-price auction
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This note was uploaded on 10/21/2009 for the course ECON ECON703 taught by Professor Professorpetercramton during the Fall '09 term at Maryland.

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98wp-demand-reductio - Demand Reduction and Inefficiency in Multi-Unit Auctions Lawrence M Ausubel and Peter Cramton University of Maryland 27 July

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