Auction Outcomes Research Articles

Increasing Diversity in Telecommunications Ownership and Increasing Efficiency in Spectrum Auctions by Breaking the Link between Capital Market Discrimination and FCC Spectrum Auction Outcomes

In Section 309(j)4(D) of the Communications Act, the Federal Communications Commission (“FCC”) is required to increase opportunities for minority groups to participate in the provision of spectrum based services. In Adarand Construction, Inc. v. Pena, the Supreme Court held that race-based government programs were subject to strict scrutiny. That is race-based programs must serve a compelling governmental interest such as remedying past discrimination, and must be narrowly tailored to serve that interest. Against this backdrop, a simple theoretical model is developed that explains the relationship between capital market discrimination and outcomes in FCC spectrum auctions. Given capital market discrimination and all other factors being equal, it is shown that a minority firm has zero probability of winning in an auction for spectrum. In addition, it is proven that, if equal bidding credits are given to all firms, if there is capital market discrimination, and if all other things are equal, the minority firm has a zero probability of winning in a spectrum auction. It is shown that a policy of auctioning spectrum, when there is capital market discrimination, is an inferior policy among policies that can be used to allocate spectrum. Finally, a policy of auctioning spectrum, when there is capital market discrimination, results in an inefficient auction. These theoretical results and the empirical literature on capital market discrimination suggest that the FCC is implicitly discriminating against minorities through its auctioning of spectrum under conditions of discrimination in capital markets. The results imply that race-based programs are necessary/justified in order to increase diversity in telecommunications ownership and increase the efficiency of FCC Spectrum Auctions. Given possible legal remedies, the paper contains a critical “audit”/analysis of the FCC's lending practices under the FCC's installment payments. Legislative proposals for creating some new form of credit/installment payment in conjunction with some experienced financial institution(s) are summarized and reviewed.

Do Unexpected Land Auction Outcomes Bring New Information to the Real Estate Market?

Land and real estate are intrinsically related but generally traded in two different markets. Vacant land, being a major “raw material” for development of real estate, is traded by developers who actively manage development risk for profit. Real estate, being a long lived final product, is traded by end-users or investors for use or investment in the secondary market. This study examines price discovery between the two markets. The key question is whether land transactions, in the form of public auctions, convey any new information to the secondary real estate market. Our results suggest unexpected land auction outcomes have both market-wide and local effects on real estate prices. However, the impacts are asymmetric. We found that lower than expected land auction prices have a significant negative market-wide and local impact on real estate prices while higher than expect land auction prices have little or no impact.

To Start Low or To Start High?

We document how starting prices differentially impact outcomes in negotiations and auctions. In negotiations (where the number of actors is often predetermined), starting prices drive cognitive processes, leading individuals to selectively focus on information consistent with, and make valuations similar to, the starting value. Thus, starting high will often lead to ending high in negotiations. Conversely, in auctions (where the number of actors is determined during the course of the auction), low starting prices catalyze social processes that can lead to higher final prices: Low starting prices lower barriers to entry and increase the number of bidders; produce more sunk costs for early entrants; and lead participants to infer greater value from this increased bidding activity, resulting in herding behavior. By examining the differential intrapsychic and interpersonal processes that starting prices activate in negotiations versus auctions, we offer a first step toward a more complete understanding of anchoring effects in economic interactions.

Total-Cost Procurement Auctions: Impact of Suppliers' Cost Adjustments on Auction Format Choice

We consider sealed- and open-bid total-cost procurement auctions where two attributes are used for contract award decisions: price, which is bid by the supplier, and a fixed cost adjustment, which is included by the buyer to capture nonprice factors such as logistics costs. Suppliers know only their own true production cost and their own cost adjustment, and the buyer does not know the suppliers' true production costs but does know all suppliers' cost adjustments, which she herself sets in order to make an informed total-cost decision. The buyer, who seeks to minimize her total (price and cost adjustment) procurement cost, can choose to run a first-price sealed-bid auction, where suppliers' bids are affected by their beliefs about each other's total costs, or a descending open-bid auction, where only the actual realizations of suppliers' total costs drive the auction outcome. We characterize the buyer's choice between the two formats as a threshold decision over suppliers' cost adjustments and analyze the effect of supplier beliefs on her decision. We also study the impact of additional suppliers on the buyer's decision, the effect of correlation between suppliers' production costs and their cost adjustments, and additive as well as multiplicative total-cost functions. The results suggest that procurement managers can use their evaluations of suppliers' cost adjustments to make better auction format decisions.

Market Sentiments, Winner’s Curse and Bidding Outcome in Land Auctions

This paper empirically tests auction theory by examining how the stock market evaluates the outcome of open-bid English auctions of rights to develop residential real estate projects in Hong Kong. To do so, we deconstruct the complexity surrounding actual auction events, and empirically isolate the influence of conflicting auction theory predictions using data from expert opinion around auction events, actual auction event and outcome data, and stock market data. The empirical findings include (1) with increasing uncertainty bidders reduce bids, thus confirming predictions following the winner’s curse thesis; (2) joint bidding does not lead to increased bids based on pooled (“better”) information, but instead leads to reduced competition; while increased competition leads to increased prices at auction, as expected; (3) the market interprets auction outcomes as information events which function to signal developers’ expectations about future market prospects; but if the winning bid is considered too high, this interpretation is revised to that of the winner’s curse; (4) with joint bidding and winning, the market’s response to joint winners is better explained by concern for winner’s curse (despite supposed better informed bids) than the acquisition of a below cost development project following reduced competition at auction; and (5) the market interprets increased competition at auction as indicator of the future direction of property price movements in the secondary market—the more intense the competition, the more positive the future prospect of the property market are seen to be.

The Impact of Participant’s Risk Attitude on Auctions Results: An Experimental Approach to Electricity Markets

We analyze the impact of the risk attitude of participating subjects in both single-sided uniform and pay-as-bid auctions using an experimental approach. The experiments are conducted in a stable demand environment with homogeneous groups, each consisting of five participants that exhibit either complete risk seeking or complete risk aversion. The results show that risk attitudes significantly affect the outcome of uniform auctions. We also note that our results differ substantially from other literature on experimental economics. We conclude that it is important to consider participants’ risk attitudes especially when conducting experiments with small groups.

The determinants of sales on eBay: the case of baseball cards

The popularity of online auctions has grown immensely with the eBay site being the largest auction site. One issue that has not received sufficient attention in the eBay auction literature is the effect of reserve-prices (or minimum prices) on the probability of a sale. Studies that have included this variable in their empirical specifications include Lucking-Reiley et al. (2000), Eaton (2002) and Jin and Kato (2002). However, all these studies used the book-price itself to determine its effect on auction outcomes. This study used alternative specifications of the reserve-price to determine if there were different effects of this variable on the probability of sale of baseball cards. These alternative specifications combined the reserve-price with the published book-prices for the baseball cards being sold. None of the three specifications of the reserve-price affected the probability of a sale including a binary variable representing reserve to book-price ratios >2.00. The rationale offered for these results is that there is a geographic mismatch when baseball cards are distributed and eBay extends the reach of the card market, which allows collectors to buy desirable cards at a premium.

Credit Default Swap Auctions and Price Discovery

The rapid growth of the Credit Default Swap (CDS) market combined with increased defaults in recent years has led to increased usage of auctions when default occurs. We examine all the CDS auctions conducted to date and evaluate their efficacy by comparing auction outcomes to prices of bonds in the secondary market. The auctions appear to have served their purpose, as we see no evidence of inefficiency in the process: participation is high, open interest is low, and the prices were similar to the prices observed before and after in the bond market. We qualify our conclusions by observing that few auctions have taken place so far. <b>TOPICS:</b>Credit default swaps, private equity, fixed-income portfolio management

A 'Position Paradox' in Sponsored Search Auctions

We study the bidding strategies of vertically differentiated firms that bid for sponsored search advertisement positions for a keyword at a search engine. We explicitly model how consumers navigate and click on sponsored links based on their knowledge and beliefs about firm qualities. Our model yields several interesting insights and a main counter-intuitive result we focus on is the position paradox. The paradox is that a superior firm may bid lower than an inferior firm and obtain a position below it, yet still obtain more clicks than the inferior firm. Under a pay-per- impression mechanism, the inferior firm wants to be at the top where more consumers click on its link, while the superior firm is better off by placing its link at a lower position as it pays a smaller advertising fee but some consumers will still reach it in the search of a higher-quality firm. Under a pay-per-click mechanism, the inferior firm has an even stronger incentive to be at the top since now it only has to pay for the consumers who do not know the firms' reputations and, therefore, can bid more aggressively. Interestingly, as the quality premium for the superior firm increases, and/or if more consumers know the identity of the superior firm, the incentive for the inferior firm to be at the top may increase. Contrary to conventional belief, we find that the search engine may have the incentive to over-weight the inferior firm's bid and strategically create the position paradox to increase overall clicks by consumers. To validate our model, we analyze a dataset from a popular Korean search engine firm and find that: (i) a large proportion of auction outcomes in the data show the position paradox, and (ii) sharp predictions from our model are validated in the data.

A “Position Paradox” in Sponsored Search Auctions

We study the bidding strategies of vertically differentiated firms that bid for sponsored search advertisement positions for a keyword at a search engine. We explicitly model how consumers navigate and click on sponsored links based on their knowledge and beliefs about firm qualities. Our model yields several interesting insights; a main counterintuitive result we focus on is the “position paradox.” The paradox is that a superior firm may bid lower than an inferior firm and obtain a position below it, yet it still obtains more clicks than the inferior firm. Under a pay-per-impression mechanism, the inferior firm wants to be at the top where more consumers click on its link, whereas the superior firm is better off by placing its link at a lower position because it pays a smaller advertising fee, but some consumers will still reach it in search of the higher-quality firm. Under a pay-per-click mechanism, the inferior firm has an even stronger incentive to be at the top because now it only has to pay for the consumers who do not know the firms' reputations and, therefore, can bid more aggressively. Interestingly, as the quality premium for the superior firm increases, and/or if more consumers know the identity of the superior firm, the incentive for the inferior firm to be at the top may increase. Contrary to conventional belief, we find that the search engine may have the incentive to overweight the inferior firm's bid and strategically create the position paradox to increase overall clicks by consumers. To validate our model, we analyze a data set from a popular Korean search engine firm and find that (i) a large proportion of auction outcomes in the data show the position paradox, and (ii) sharp predictions from our model are validated in the data.

AN ANALYSIS OF STRATEGIC BEHAVIOR IN eBAY AUCTIONS

A relatively new type of panel data analysis is becoming more and more topical in the applied econometrics literature as auction mechanisms are being explored in more depth. The typical data utilized in such studies involves repeated measures of auction outcomes, where the variable of interest involves order statistics from the sample of bids from many bids on completed auctions for a particular commodity. This article presents structural estimates of bidding behavior in eBay computer monitor auctions. We exploit characteristics of such repeated measures to analyze the efficiency of private value auctions for a relatively homogeneous good, computer monitors sold on eBay. We discuss how outcomes of the auction mechanism can be analyzed and their equilibrium outcomes assessed and evaluate the consumer surplus that is generated from such auctions. Particular attention is given to the collection of the eBay data from data recovery protocols that monitor in real time and in relative detail, characteristics of a particular auction with heterogeneity controls for different types of monitors and for different reputation effects of the auctioneer. Among other findings, our results point to a rejection of the use of Jump Bidding (Avery, 1998) or "Snipe or War" bidding (Roth and Ockenfels, 2002). We also find that longer auctions only have a small effect on price and experienced auctioneers respond to this incentive.

The Effect of Different Reserve Prices on Auction Outcomes

To ensure that their item does not sell below a minimum value, auction sellers can set a reserve price or insert their own 'shill' bids. We present results from a controlled experiment in which we auctioned identical $20 Starbucks gift cards in order to test different price floors’ effects on sale prices and bidding activity. We find that all price floors decrease the number of bids and the number of bidders in an auction. Higher price floors increase the average sale price, but compared to a control group the difference is only significant at a binding level. In contrast, seller profits are maximized by setting no price floor, but we predict that the advantage of price floors will intensify with higher value items or items in thinner markets. We explain our results using the anchoring effect, selection effects and the eBay setup.

Sniping and Squatting in Auction Markets

We conducted a field experiment to test the benefit from late bidding (sniping) in online auction markets. We compared sniping to early bidding (squatting) in auctions for newly-released DVDs on eBay. Sniping led to a statistically significant increase in our average surplus. However, this improvement was small. The two bidding strategies resulted in a variety of other qualitative differences in the outcomes of auctions. We show that a model of multiple concurrent auctions, in which our opponents are naïve or incremental bidders as identified in the lab, explain the results well. Our findings illustrate how the overall impact of naïveté, and the benefit from sniping observed in the lab, may be substantially attenuated in real-world market settings. (JEL D44)

Uncertainty and Auction Outcomes: Evidence from Used Car Actions

I study the sequence of bidding in an open-outcry English auction to examine how uncertainty affects auction outcomes. I do this by analyzing a data set that was collected from a series of public auctions of used cars in New Jersey. I conjecture that the uncertainty is related to the auction’s progress and demonstrate that, empirically, an increase in the uncertainty is associated with an increase in the number of rounds that is required to sell an object and with a reduction in the ratio of the selling price to the presale estimate.

Credit Default Swap Auctions

The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market. The auctions appear to have served their purpose, as we find no evidence of inefficiency in the process: Participation is high, open interest is low, and the auction prices are close to the prices observed in the bond market before and after each auction has occurred. We qualify our conclusions by noting that relatively few auctions have taken place thus far.

The Effect of Alternative e-Prices on eBay Book Auctions

This paper uses the usual eBay auction variables and some data from ABE and Amazon, namely, lot size and the alternative e-price, the lowest price for a given book on a given site, to examine in the question of how information from ABE and Amazon affects eBay auction outcomes. We find that although lot-size sometimes affects bids and final sale price, the alternative e-price effects are more important. Sellers on eBay set their minimum prices below the alternative e-prices, but the closer the minimum price is set to the alternative e-price, the lower the final sale price. Decomposing this result into bidding versus final sale price per se effects, our evidence suggests that the primary comparison shopping effect is on bidding behavior.

Click Fraud

Click fraud is the practice of deceptively clicking on search ads with the intention of either increasing third-party website revenues or exhausting an advertiser's budget. Search advertisers are forced to trust that search engines detect and prevent click fraud even though the engines get paid for every undetected fraudulent click. We find conditions under which it is in a search engine's interest to allow some click fraud. Under full information in a second-price auction, if x% of clicks are fraudulent, advertisers will lower their bids by x%, leaving the auction outcome and search engine revenues unchanged. However, if we allow for uncertainty in the amount of click fraud or change the auction type to include a click-through component, search engine revenues may rise or fall with click fraud. A decrease occurs when the keyword auction is relatively competitive because advertisers lower their budgets to hedge against downside risk. If the keyword auction is less competitive, click fraud may transfer surplus from the winning advertiser to the search engine. Our results suggest that the search advertising industry would benefit from using a neutral third party to audit search engines' click fraud detection algorithms.

Governance and game theory: When do franchise auctions induce firms to overbid?

The use of auctions as an instrument of public policy has been hailed as evidence of the utility and validity of game theory. In this paper, we focus on extreme cases – centrally, spectrum auctions in the UK and Germany in 2000 – to argue that the canonical game theoretic interpretations of firm behaviour in some (highly “successful”) auction outcomes are inadequate, that the economics of governance critique of franchise bidding can be extended to provide a better interpretation, and that under specified conditions, notably high uncertainty, policy-makers should design franchise auctions to avoid overbidding, rather than attend to the more conventional challenge of underbidding.

Push or Pull? Auctioning Supply Contracts

Consider a buyer, facing uncertain demand, who sources from multiple suppliers via online procurement auctions (open descending price-only auctions). The suppliers have heterogeneous production costs, which are private information, and the winning supplier has to invest in production capacity before the demand uncertainty is resolved. The buyer chooses to offer a push or pull contract, for which the single price and winning supplier are determined via the auction. We show that with a pull contract, the buyer does not necessarily benefit from a larger number of suppliers participating in the auction, due to the negative effect of supplier competition on the incentive of supplier capacity investment. We thus propose an enhanced pull mechanism that mitigates this effect with a floor price. We then analyze and compare the outcomes of auctions for push and (enhanced) pull contracts, establishing when one form is preferred over the other based on the buyer's profits. We also compare our simple, price-only push and pull contract auctions to the optimal mechanisms, benchmarking the performance of the simple mechanisms as well as establishing the relative importance of auction design and contract design in procurement auctions.

Secure quantum sealed-bid auction

A new experimentally feasible and secure quantum sealed-bid auction protocol using quantum secure direct communication based on GHZ states is proposed. In this scheme all bidders Bob, Charlie,…, and Zach use M groups n-particle GHZ states to represent their bids. Here, an auctioneer gives the auction outcome by performing a sequence of n-particle GHZ-basis measurements on the final quantum states. It has been shown that using this method guarantees the honesty of the protocol, and malicious bidders can not collude with the auctioneers.