Market structure and incomplete information: Price formation in a real-world repeated English auction

Abstract

This paper examines the effect of buyer size on price formation in an English auction of used state police cars. While open auctions generally favor competitive pricing, Bikhchandani (1988) develops a model of a second-price, common value auction in which bidders can use strategic behavior based on repeated sales to develop an aggressive reputation and, as a result, pay lower prices in equilibrium. The paper tests this hypothesis by examining sales of 340 used automobiles sold at 13 public auctions conditional on the volume of purchases made by the three largest buyers at the auctions. The empirical results show that the number of buyers plays a stronger role in price formation than does buyer size.