The optimality of being efficient : designing auctions

A cornerstone of the auction literature is the theory of"optimal auctions."'This theory uses mechanism design techniques to characterize, in general settings, the auction that maximizes the seller's expected revenues. One feature of the solution is that typically there is a conflict between the goals of revenue maximization and efficiency. The revenue-optimizing seller often either places goods in hands other than those who value them the most or withholds goods entirely from the market. However, the conclusion that the seller gains by assigning goods inefficiently depends critically on two strong assumptions: (1) the seller can prevent resale among bidders from occurring after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. In this paper, the authors examine how the optimal auction problem changes when one or both of these assumptions are relaxed. This paper is organized as follows. In section 2, the authors establish the seller's general incentive to misassign goods and they identify settings where the optimal auction is efficient. In section 3, they solve two variations on the optimal auction, which recognize the possibility of resale. Section 4 proves that perfect resale destroys the seller's incentive to misassign goods. Section 5 establishes that with perfect resale, any misassignment of goods results in strictly lower seller revenues than the best efficient assignment. In section 6, the paper shows that the Vickrey auction is not distorted by the possibility of resale.International Terrorism&Counterterrorism,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Markets and Market Access,Economic Theory&Research,Banks&Banking Reform,Access to Markets,International Terrorism&Counterterrorism,Environmental Economics&Policies

Endogenous entry and auctions design with private participation costs

This paper studies endogenous entry and ex ante revenue-maximizing auctions in an independent private value setting where potential bidders have private-information entry costs. The contribution of this paper is four-fold. First, we show that any equilibrium entry can be characterized through a set of continuous and monotonic shutdown curves that separate the bidders' types into participating and nonparticipating categories. Second, the expected winning probability of a participant does not depend on his private entry cost. Furthermore, the expected winning probabilities of the participating types are given by the slopes of the shutdown curves. Third, symmetric entry equilibria (shutdown curves) implemented by the classes of ex post efficient or ex post revenue-maximizing mechanisms are completely characterized. Fourth, within these two classes of mechanisms, a modified Vickrey auction with uniform reserve price and entry subsidy is ex ante revenue-maximizing. The desired entry subsidy and reserve price are determined by the lower end of the corresponding shutdown curve.Auctions Design; Ex Post Efficiency; Endogenous Participation; Multidimensional Screening; Vickrey Auction

The Optimality of Being Efficient

In an optimal auction, a revenue-optimizing seller often awards goods inefficiently, either by placing them in the wrong hands or by withholding goods from the market. This conclusion rests on two assumptions: (1) the seller can prevent resale among bidders after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. We examine how the optimal auction problem changes when these assumptions are relaxed. In sharp contrast to the no resale assumption, we assume perfect resale: all gains from trade are exhausted in resale. In a multiple object model with independent signals, we characterize optimal auctions with resale. We prove generally that with perfect resale, the seller's incentive to misassign goods is destroyed. Moreover, with discrete types, any misassignment of goods strictly lowers the seller's revenue from the optimum. In auction markets followed by perfect resale, it is optimal to assign goods to those with the highest values.Auctions; Multiple Object Auctions; Resale

Dynamic Auctions: A Survey

We survey the recent literature on designing auctions and mechanisms for dynamic settings. Two settings are considered: those with a dynamic population of agents or buyers whose private information remains fixed throughout time; and those with a fixed population of agents or buyers whose private information changes across time. Within each of these settings, we discuss both efficient (welfare-maximizing) and optimal (revenue-maximizing) mechanisms.Dynamic auctions and mechanisms, Random arrivals and departures, Changing private information, Incentive compatibility

Package Bidding for Spectrum Licenses

The FCC was an innovator in adopting the rules of the simultaneous ascending-price auction for its sales of spectrum licenses. While these rules have performed well in the auctions conducted so far (and would perform even better with the design improvements suggested in our first report), there are two inherent limitations in any design that seeks to assign and price the licenses individually. First, such designs create strategic incentives for bidders interested in multiple licenses that are substitutes to reduce their demands for some of the licenses in order to reduce the final prices of the others; this is the demand reduction problem. Second, even if bidders behave non-strategically, there is a fundamental problem with the basic concept of individual-license pricing when licenses are complementary. In simultaneous ascending-price auctions, from a bidder's perspective this is the exposure problem. A bidder who is unsuccessful in bidding for a large package of licenses may be left with a partial package whose total price cannot be justified in the absence of those complementary licenses it failed to win. This problem is present in any auction mechanism that sells licenses individually, with no opportunity to bid on packages. In this report our task is confined to analyses of the merits of package bidding and the practical problems of implementation. In our next report, we will outline proposals for the details of the procedural rules and other aspects of implementing a practical design, as well as the software development that would be necessary.Auctions; Spectrum Auctions; Multiple-Round Auctions; Efficiency

A Simple Auction Mechanism for the Optimal Allocation of the Commons

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). Different mechanisms have been proposed for inducing firms to reveal their private information but for reasons I discuss in the paper, I find these mechanisms of limited use. I propose a much simpler mechanism that implements the first-best for any number of firms: a uniform price sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively.

A more efficient procurement mechanism for reserver capacity in the German market for balancing power

From auction theory we know that multi-unit, pay-as-bid auctions in general lead to bid shading and thus to an inefficient allocation. This result is supported by historical data from the German market for balancing power, which show that bidders bid well above their actual costs. In contrast to the pay-as-bid auction, the Vickrey auction has the dominant strategy property and bidders reveal their true opportunity cost. Consequently, the Vickrey auction allocates efficiently. In this article we show how this auction format can facilitate an efficient capacity procurement process in the German reserve market. --Electricity market,balancing power,uniform-price auction,pay-as-bid auction