Asymmetric information about rivals' types in standard auctions: An experiment

This paper studies experimentally how information about rivals' types affects bidding behavior in first- and second-price auctions. The comparative static hypotheses associated with information about rivals enables us to test the relevance of such information as well as the general predictions of the auction theory, by providing an effective means to control for risk aversion and other behavioral motives that were difficult to control for in previous experiments. Our experimental evidence provides strong support for the theory, and sheds light on the roles of risk aversion and the spite motive in first- and second-price auctions, respectively

Know thy enemies : knowledge of rivals' types and its effect on auctions

auctions

TRANSPARENCY AND BIDDING COMPETITION IN INTERNATIONAL WHEAT TRADE

One of the major trade policy problems identified by U.S. interests, including grower groups, traders, and policymakers, is that of pricing transparency. This has been a gnawing issue generally related to the pricing practices of competitor exporting countries with state trading enterprises (STEs). The transparency problem generally refers to the inability to observe rivals' terms of trade (including price, quality, credit, etc.) and is normally associated with commercial exporters competing against STE rivals. The perception being the less transparent competitors (STEs) would have a strategic advantage. A game theory model of bidding competition was developed to simulate the effects of information asymmetry amongst rivals. A Bayes-Nash equilibrium was used to derive equilibrium solutions. Several stylized examples were used to illustrate aspects of competition and to analyze effects on bidding strategies. Results indicate that: 1) anything that reduces uncertainties among rivals would reduce equilibrium bids and prices; 2) bidding situations in which there is less transparency have the effect of increasing bids and prices to buyers, and payoffs to sellers; and 3) increases in the number of rivals have the effect of reducing bids and mitigating the informational advantages of STEs. In all cases, less transparent sellers have an advantage in bidding competition relative to more transparent sellers. That advantage in our stylized case was in the area of 1-2$/mt. However, that advantage is mitigated with an increase in the number of transparent rivals and in the case where more transparent players have acted as agents for an STE and have more information about costs of an STE. Further, cessation of exports under U.S. EEP programs should have decreased the transparency of U.S. firms, increasing their competitiveness in the international grain trade.Price Transparency, Strategic Bidding, Game Theory, Bayesian-Nash, State Trading Enterprises, Export Enhancement Program, Wheat, International Relations/Trade,

Recombinant Estimation for Normal-Form Games, with Applications to Auctions and Bargaining

In empirical analysis of economic games, researchers frequently wish to estimate quantities describing group outcomes, such as the expected revenue in an auction or the mean allocative efficiency in a market experiment. For such applications, we propose an improved statistical estimation technique called "recombinant estimation." The technique takes observations of the complete strategy of each player and recombines them to compute all the possible group outcomes which could have resulted from different matches of players. We calculate the improvement in efficiency of the recombinant estimator relative to the standard estimator, and show how to estimate standard errors for the recombinant estimator for use in hypothesis testing. We present an application to a two-player sealed-bid auction and a two-player ultimatum bargaining game. In these applications, the improved efficiency of our estimator is equivalent to an increase of between 40% and 200% in the sample size. We discuss how to design game experiments in order to be able to take full advantage of recombinant estimation. Finally, we discuss practical computational issues, showing how one can avoid combinatorial explosions of computing time while still yielding significantly improved efficiency of estimation.

The Amsterdam Auction

Auctions used to sell houses often attract a diverse group of bidders, with realtors and speculators out for a bargain competing against buyers with a real interest in the house. Value asymmetries such as these necessitate careful consideration of the auction format as revenue equivalence cannot be expected to hold. From a theoretical viewpoint, Myerson's (1981) mechanism design approach has identified the seller's optimal choice. The proposed mechanism entails assigning credits to weaker bidders to promote competition and setting bidder-specific reserve prices. In practice, however, sellers often lack the detailed information needed to choose credits and reserve prices optimally, nor can they always discriminate among bidders. A more practical solution to the seller's problem is suggested by the "Amsterdam auction," where a premium is offered to encourage weak bidders to compete aggressively. This auction format, which has been used to sell houses in Amsterdam for centuries, treats all bidders the same and does not rely on detailed information about their value-distributions. In this paper, we consider premium auctions like the one in Amsterdam and demonstrate their revenue-generating virtues in asymmetric situations. We report the results of an experiment, which compares the standard first-price and English formats with two premium auctions in symmetric and asymmetric settings. The introduction of a premium leads weak bidders to set an endogenous reserve price for stronger rivals, with a dramatic effect on the sales price. Awarding a premium raises revenues, especially since Bertrand competition between weaker bidders virtually dissipates the premium to be paid.Auctions, experiments, asymmetries, premium

Assessing Social Costs of Inefficient Procurement Design

This paper considers the social costs implied by inefficient allocation of contracts in a first price, sealed bid procurement auction with asymmetric bidders. We adopt a constrained (piecewise linear) strategy equilibrium concept and estimate the structural parameters of the bidders’ distribution of costs. We estimate social costs defined as the predicted cost difference between the winning firm and the most efficient bidding firm. We also compare the expected procurement costs under two different auction formats. The data is collected from procurement auctions of road painting in Sweden during 1993-99. The results indicate that the social costs of inefficient contract allocation is about 1.7 per cent of total potential social cost and that an efficient second price auction would lower the expected procurement cost by 2.8 per cent.Procurement auctions; inefficiency; constrained strategy equilibrium; simulation

The Impact of Public Information on Bidding in Highway Procurement Auctions

A number of papers in the theoretical auction literature show that the release of information regarding the seller’s valuation of an item can cause bidders to bid more aggressively. This widely accepted result in auction theory remains largely untested in the empirical literature. Recent theoretical work has also shown that this effect can be more pronounced in auctions with larger common cost uncertainty. We examine the impact of a policy change by the Oklahoma Department of Transportation that led to the release of the state’s internal estimate of the costs to complete highway construction projects. We perform a differences-in-differences analysis comparing bidding in Texas, a state that had a uniform policy of revealing the same information all throughout the period of analysis, to bidding in Oklahoma. Our results show that, in comparison to Texas auctions, the average bid in Oklahoma fell after the change in engineers’ cost estimate (ECE) policy. This decline in bids was even larger for projects where the common uncertainty in costs is greater. Moreover, the within-auction standard deviation of bids fell after the change in ECE policy with the most significant decline observed again in projects with greater common cost uncertainty.Information Release, Procurement Auctions

Unilateral and Exclusionary/Strategic Effects of Common Agency: Price Impacts in a Repeated Common Value English Auction

The business justification for multiple principals to hire a common agent is efficiency. Our empirical study demonstrates that the creation of the common agent unilaterally depresses winning bids. Additionally, the common agent was not only observed to be the dominant bidder but also paid significantly lower prices than fringe competitors (price/quantity differential). The observed price/quantity differential is consistent with the almost common value English auction theory developed by Rose and Kagel (2008) in which a cost advantaged bidder is able to reduce competition by credibly raising the costs of disadvantaged rivals associated with the winner’s curse.Common Value Auctions, Common Agency, Antitrust, Industrial Organization, D44, K21, K23,

Increasing Competition and the Winner's Curse: Evidence from Procurement

We assess empirically the effects of the winner's curse which, in common-value auctions, counsels more conservative bidding as the number of competitors increases. First, we construct an econometric model of an auction in which bidders' preferences have both common- and private-value components, and propose a new monotone quantile approach which facilitates estimation of this model. Second, we estimate the model using bids from procurement auctions held by the State of New Jersey. For a large subset of these auctions, we find that median procurement costs rise as competition intensifies. In this setting, then, asymmetric information overturns the common economic wisdom that more competition is always desirable