A Theory of Jump Bidding in Ascending Auctions

Jump bidding is a commonly observed phenomenon that involves bidders in ascending auctions submitting bids higher than required by the auctioneer. Such behavior is typically explained as due to irrationality or to bidders signaling their value. We present field data that suggests such explanations are unsatisfactory and construct an alternative model in which jump bidding occurs due to strategic concerns and impatience. We go on to examine the impact of jump bidding on the outcome of ascending auctions in an attempt to resolve some policy disputes in the design of ascending auctions.auction theory, ascending auctions, jump bidding

Intimidation or Impatience? Jump Bidding in On-line Ascending Automobile Auctions

We run a large field experiment with an online company specializing in selling used automobiles via ascending auctions. We manipulate experimentally the maximum amount which bidders can bid above the current standing price, thus affecting the ease with which bidders can engage in jump bidding. We test between the intimidation vs. costly bidding hypotheses of jump bidding by looking at the effect of these jump-bidding restrictions on average seller revenue. We find evidence consistent with costly bidding in one market (Texas), but intimidation in the other market (New York). This difference in findings between the two markets appears partly attributable to the more prominent presence of sellers who are car dealers in the Texas market.

Bidding Strategies in Internet Yankee Auctions

A bidding strategy commonly observed in Internet auctions, though not frequently in live auctions, is that of "jump-bidding," or entering a bid larger than necessary to be a current high bidder. In this paper, we argue that the cost associated with entering on-line bids and the uncertainty concerning bidding competition -- both of which distinguish Internet from live auctions -- can explain this phenomenon. We present a simple theoretical model that accounts for the preceding characteristics, and derive the conditions under which jump-bidding constitutes an equilibrium strategy in a format commonly used for on- line trading, the Yankee Auctionâ. We then present evidence recorded from hundreds of Internet auctions that is consistent with the basic predictions from our model. We find that jump-bidding is more likely earlier in an Internet auction, when jumping has a larger strategic value, and that the incentives to jump bid increase as bidder competition becomes stronger. Several of our results have implications for starting bid and minimum bid increment rules set by Internet auction houses. We also discuss possible means of reducing bidding costs, and evidence that Internet auctioneers are pursuing this goal.internet auctions, bidding costs, jump bidding

Why Do Sellers (Usually) Prefer Auctions?

We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.Auctions, jump bidding, sequential sales, procurement, entry

When are Auctions Best?

We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.auctions, jump bidding, sequential sales, procurement, entry.

Bidding Strategies in Internet Yankee Auctions: Theory and Evidence

In the past few years, we have witnessed a tremendous proliferation of transactions using the Internet as a virtual marketplace. U.S. News and World Report estimates the value of electronic commerce around $13 billion in 1998. In addition to transactions where prices are posted, sellers also use Internet auctions to sell goods such as clothing, collectibles, computers, and electronics. Current estimates place the value of auction transactions in the Internet at$30 million per week. A popular format for Internet auctions is the Yankee format. Here, a seller offers k identical units for sale, and bidders specify how many units they want and the per-unit price they want to pay. Bidding takes place progressively over a predetermined time period and the k highest bids at closing win the units at their specified prices. Ties are broken on the basis of quantities first and time of bidding second. Two features make these auctions different from standard auctions. First, unlike "live" auctions with fixed participation costs, entering each bid may be costly in a Yankee auction since bidding takes place over several hours (or days) and, in addition to connectivity cost, several minutes time must spend several registering the new price. Second, each time the bidder visits the auction site, she is uncertain about the competition since it is possible for more bidders to decide to enter before the closing. Here, we derive and characterize equilibrium strategies in simple Yankee auctions with stochastic demand. We show that costly bidding may induce bidders to bid high or jump bid in earlier rounds. These jump bids play a signaling role; they attempt to discourage later bidders from competing with established bidders. This way, under some conditions, both sender and receiver of the signal may be better off in equilibrium. The sender because deterring competition saves her the costs of additional bids, and the receiver because she avoids the costs of fruitless early competition. Here, we derive conditions on bidding costs and bidder types that result in a signaling equilibrium of this nature. We show that the characteristics of the equilibrium are closely related to the structure of demand uncertainty faced by the bidders since signal bidding has more strategic value when bidders anticipate further competition later in the auction. We use data from hundreds of Yankee Auctions to test some predictions of the jump-bidding model. In confirmation, we find (a) over 40% of the bidders in our sample enter jump bids, (b) any individual bidder is more likely to enter a jump bid as his first bid, (c) earlier bidders are more likely to enter jump bids than later bidders, (d) the relative size of a jump bid is increasing in the number of bidders relative to units being sold, and (e) the relative size of a jump bid is decreasing in the object's average value. We conclude with a discussion of the implications of costly bidding and jump-bidding strategies on Internet auction design.

A communication equilibrium in English auctions with discrete bidding

This paper analyses a model of a common value English auction with discrete bidding. In this model, we show that there exists a communication equilibrium in which the high signal bidder strategically chooses his first bid so as to maximise his expected utility. Straightforward bidding, or increasing the bid by the minimum amount possible, is the equilibrium strategy for both bidders in all other auction rounds. We relate this result to recent research on English auctions with discrete bidding and auctions where bidders may have noisy information about their opponent's signals.English Auctions, discrete bidding, communication equilibrium

Money Out of Thin Air: The Nationwide Narrowband PCS Auction

The Federal Communications Commission held its first auction of radio spectrum at the Nationwide Narrowband PCS Auction in July 1994. The simultaneous multiple-round auction, which lasted five days, was an ascending bid auction in which all licenses were offered simultaneously. This paper describes the auction rules and how bidders prepared for the auction. The full history of bidding is presented. Several questions for auction theory are discussed. In the end, the government collected $617 million for ten licenses. The auction was viewed by all as a huge success-an excellent example of bringing economic theory to bear on practical problems of allocating scarce resources.Auctions; Spectrum Auctions; Multiple-Round Auction

When are Auctions Best?

We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.