Auctions with Resale Markets: An Exploratory Model of Treasury Bill Markets

Abstract

This paper develops a model of competitive bidding with a resale market. The primary market is modelled as a common-value auction, in which bidders participate for the purpose of resale. After the auction the winning bidders sell the objects in a secondary market and the buyers on the secondary market receive information about the bids submitted in the auction. The effect of this information linkage between the primary auction and the secondary market on bidding behaviour in the primary auction is examined. The auctioneer's expected revenues from organizing the primary market as a discriminatory auction versus a uniform-price auction are compared, and plausible sufficient conditions under which the uniform-price auction yields higher expected revenues are obtained. An example of our model, with the primary market organized as a discriminatory auction, is the U.S. Treasury bill market. *We thank John Cox for kindling our interest in Treasury bill auctions and Margaret Meyer for helpful conversations. We are grateful to Chiang Sung of the Chemical Bank for answering many of our questions on the organization of Treasury bill auctions. We would also like to acknowledge helpful comments from seminar participants at City College of New York, Princeton, Stanford and UCLA. The second author is grateful for support under the Batterymarch Fellowship Program. ^Anderson Graduate School of Management, University of California, Los Angeles, CA 90024 'Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139