The Informational Role of the Minimum Bid Increment Policy in a Repeated Simultaneous Auction with Synergies Between Items

Abstract

The informational role of the minimum bid increment (MBI) policy in a simultaneous repeated auction is analyzed when there exists synergies between pairs of items and the extent of such synergies is private information. The observed behaviour in the FCC auction namely that each bidder lowers the extent by which he shades his valuation over time is modelled by using a myopic strategy modified for the winning rule that is appropriate for repetitive simultaneous bidding. The seller is better off both in terms of expected revenue and the price obtained for the item using a MBI policy rather than the policy of announcing a reservation (ask) price at the start of each round. A given MBI yields the seller a higher expected revenue when synergies are present. The observed behavior of jump bids, with the size of the equilibrium jump increasing in the extent of synergy, is rationalized by modelling synergies as superadditivity of bidders' common value estimates. JEL Classification: D44, D82.