Strategic Overbidding in Dynamic Auctions: Structural Estimation of Value of Synergy

Abstract

In this study, we formulate and estimate a dynamic procurement auction game where bidder asymmetry due to synergy is endogenous. The seller sells multiple goods via a sequence of first‐price auctions. While bidders are ex‐ante symmetric, the first‐period winner has a valuation advantage as a result of such synergy in the second‐period bidding game and becomes a strong bidder. This endogenous synergy creation leads to overbidding in the first‐period auction relative to a static bidding game. We characterize the equilibrium in terms of the observed bid distribution and suggest a two‐step estimation procedure. We apply our method to data on OCS oil‐tract auctions. We find that the federal government recovers 52% of the “strong” buyers’ willingness to pay in the second period. Bidders perceive the value of synergy to be about 5% of their first period’s informational rent. Counterfactual experiments show that government revenue could have increased by about 27% under alternative selling mechanisms.