Open Auction Research Articles

Standard Auctions with Identity-Dependent Externalities

I analyze equilibrium bidding behavior in the open ascending-bid auction with identity-dependent externalities. With reciprocal externalities, the allocation is determined by bidders' consumption values alone. With large nonreciprocal externalities, the open auction generates higher expected revenue compared to standard sealed-bid auctions. The progress of the open auction reveals more information about the identity of the potential winner, allowing active bidders greater opportunity to avoid incurring payoff-reducing externalities. The associated option value to staying active up until a relatively high price translates into higher expected revenue. Multiple bidders may sequentially quit at the same price, and relative to sealed-bid auctions, bidders experience less ex post regret.

The Effects of Mergers in Open Auction Markets

The buyer solicits bids from suppliers with different cost distributions defined by their capacities. The expected market share of each supplier is the ratio of its capacity to the industry capacity. The buyer's optimal reserve price declines with increases in the concentration of the industry. The lower reserve price can partially or fully offset the price effects of a merger. However, a merger still reduces the buyer's welfare because there is an increased probability of internal production at a higher cost. The lower reserve price can also undermine the incentive for larger suppliers to merge and result in stable industry structures for which no further mergers would be profitable.

Performance testing of a negotiation platform

Accessible from all over the world, the EC became an indispensable element to our society. It allows the use of electronic systems to exchange products, services and information between the different existent users. During these exchanges, it is very important to assure a good quality of service. However, the enormous expansion of the Internet users push its resources to the maximum of its limits, which provoke, in many cases, an important degradation in its performance. Consequently, it is primordial to analyze the capacity of servers in order to handle heavy workloads that are growing considerably as a function of the number of users. It is, therefore, necessary to conduct performance tests before servers' deployment in order to detect any imperfection and predict their behavior under stress. In this context, this paper present a simplified performance evaluation of the “alpha” version of a negotiation platform called Generic Negotiation Platform (GNP) dated on September 2000. This platform is still under development. Many performance factors could be examined in this evaluation. However, we considered only the response time factor because of its important impact on auctions and negotiations applications. We mostly oriented this study to give us an idea about the variation of the average response time of the server as a function of the number of users and the type of different transactions. We also tried to evaluate the effect of the auctions' rules on the server average response time. We limited our study to the close and open auctions at the second price. This study followed the traditional way of doing performance tests. Therefore, we fixed our test objectives and criterion and then create our own scripts. Once the nature of the workload of the server was specified, we created an adequate benchmark to generate requests to the server. Afterwards, the average response time of each considered transaction was collected. In order to interpret these results properly, we calculated the standard deviation and the coefficient of variation of each set of values.

The Effects of Opening and Closing Procedures on the NYSE and Nasdaq

We study the effects of opening and closing procedures on the NYSE and Nasdaq by examining firms that moved from the Nasdaq to the NYSE and a sample of size-matched firms. We find that opening trades on the NYSE are about 20 percent less costly to execute than later comparable trades, while closing trades are slightly more costly. On the Nasdaq, both opening and closing trades are slightly more costly. The savings on the NYSE open are increasing with the size of firms. While the consolidation of orders at the NYSE opening auction appears to reduce costs, we also find that opening quotes are subject to temporary price pressures though transaction prices appear to be unaffected. At the close, NYSE trades obtain comparable executions and quotes do not appear to be distorted. However, closing trades appear to be affected by temporary liquidity pressures, particularly market-on-close orders. We find that price discovery overnight and through the first half hour of trading is comparable across both market systems. However, price discovery is more pronounced in the earlier part of the rest of the day on the NYSE. Also, opening quotes are delayed as NYSE specialists complete opening auctions, thus delaying price discovery during the first half hour of trading. Finally, we find that the official closing quote on the NYSE reflects more information than quotes prevailing at end of the day, the last third market quote, either of the last two transactions of the day, or the very last quote provided for a given stock.

Price Discovery in Auction Markets: A Look Inside the Black Box

Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening price and test the model using order-level data. We show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market. This is consistent with specialists extracting information from observing the evolution of the limit order book. In addition, the specialist's opening trade reflects noninformational factors such as price stabilization requirements.

Information acquisition and research differentiation prior to an open-bid auction

This paper develops a model of information acquisition prior to an open auction. The common value (“quality”) of the item for sale has two distinct components. Each of two bidders must first acquire expertise and specialize in one component, then decide how much research to conduct, and finally decide how much to bid. The model provides a rationale for bidders to differentiate themselves by conducting different lines of research. Further, it shows that research differentiation can lead to both inefficiently higher research efforts and a less efficient allocation of the item, so that the seller's expected revenue and social welfare are lower than if bidders do not differentiate their research.

Asymmetric private values auctions with application to joint bidding and mergers

Much of the theoretical auction literature assumes that there are no observable differences between the bidders of an auction. In this paper, I present an asymmetric auction model where the distribution of a bidder's value depends on some commonly observed characteristics. The model is applied to joint bidding and mergers in auction markets. The results provide additional evidence that first-price auctions are less susceptible to the acquisition and exercise of market power than open auctions.

Analyzing the Airwaves Auction

The design of the Federal Communications Commission spectrum license auction is a case study in the application of economic theory. Auction theory helped address policy questions such as whether an open auction or a sealed-bid auction should be used; whether the licenses should be auctioned sequentially or simultaneously; whether the government should allow bids for combinations of licenses or accept only single-license bids; how the auction should should be structured to promote the interests of minority-owned and other designated firms; whether the government should impose royalties or reserve prices; and how much the bidders should be informed about their competition.

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

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.

Salary determination in major league Baseball: A classroom exercise

AbstractAs a part of an economics course, The Economics of Major League Baseball, students were assigned the responsibilities of team owners who had to assess the quality and value of players, put a product on the market (their baseball team), pay salaries and maximize profits. The season was simulated using the Earl Weaver Baseball software and involved a schedule of 162 games for each team. The exercise was used to examine salary determination in major league baseball. The exercise was modelled as closely as possible to the actual structure of major league baseball with the clearest distinction being the acquisition of players. The owners in the experiment purchased players in the open‐outcry English auction. The results of the auction showed that salaries matched marginal revenue products and that the open auction displayed the declining price anomoly discovered to exist in real‐world auctions.

Selling Spectrum Rights

The design of the FCC spectrum-license auction is a case study in the application of economic theory. Auction theory helped address policy questions such as: Should an open auction or a sealed-bid auction be used? Should the licenses be auctioned sequentially or simultaneously? Should the government allow bids for combinations of licenses, or should it accept only single-license bids? How should the auction be structured to promote the interests of minority-owned and other designated firms? Should the government impose royalties or reserve prices? How much should the bidders be informed about their competition?

Public choice in the tertiary art market

InMaking the Mummies Dance, Thomas Hoving, former director of the Metropolitan Museum of Art, articulates a blistering defense of his, admittedly minority, view; namely, that trading directly with dealers when selling deaccessioned works of art or adding to museum collections is preferable to buying and selling in the open auction market (Hoving, 1992). Hoving has been severely criticized for his trades during his tenure at the Metropolitan, as well as for his assessment of the market for fine arts, which runs counter to the prevailing views held by many American public officials, professional art critics and museum boards. We shall present a theoretical model in support of Hoving's argument that trades made at auctions may not serve the public interest. We shall also statistically investigate the stochastic processes which characterize the tertiary art market.

Information, Intermediaries and Sales Strategy in an Urban Housing Market: The Implications of Real Estate Auctions in Melbourne

The influence of groups such as real estate agents on the operation of local housing markets has been a consistent theme in urban studies. In Melbourne, an increasing incidence of property sales by means of open auctions is the result of a sustained campaign by the real estate industry. Such sales have substantial benefits for the agents and alter many of the strategies for buying adopted by both buyer and seller. However, it is apparent that there are a number of unintended impacts including making the purchase of housing more difficult or risky for some groups. The practice of auctioning is seen to be an active element in determining housing access and the basis for social change within neighbourhoods subject to a high incidence at auctions. Thus the actions of agents can be seen to have far reaching effects in terms of the socio-spatial outcomes of the housing market.

Tender Offer Auctions, Resistance Strategies, and Social Welfare

In a seminal article, Easterbrook and Fischel argue that social welfare would be increased if corporate managers were precluded from conducting an auction for control of their firms once they had become the target of a tender offer. Auctions increase the price the successful bidding firm must pay for the target firm's shares. Though this ex-post wealth transfer (from the stockholders of the acquiring firm to those of the target firm) has no clear welfare implications, the ex-ante reduction in the gains to acquiring firms from an anticipated auction reduces the incentives of potential acquirers to search for potential targets. Thus, they argue that a legal regime that facilitates auctions will result in less search and fewer value-increasing takeovers. In conclusion, Easterbrook and Fischel advocate a mandated rule of passivity on the part of target managers. In a series of articles, Bebchuck (1982a; 1982b) and Gilson (1982) take exception to the Easterbrook and Fischel passivity rule and argue that social welfare is enhanced by allowing target managers to conduct auctions for their firms. They argue that the beneficial effects of moving the target's resources to their highest-valued use via an open auction outweigh what they consider to be the negligible deterrent effect on the incentives of potential acquirers to search for potential targets.

Auctions with Endogenous Quantity

This article studies auctions in which several sellers compete for the right to sell to a market characterized by a negatively sloped demand curve. In this environment the quantity traded becomes endogenous; this effect leads to three results concerning the outcomes of open versus (first-price) sealed-bid auctions. First, an open auction yields a higher expected price than does sealed bidding. Second, and more important, the open auction captures less of the potential gains from trade than does the sealed-bid auction. Third, for broad classes of demand curves, the efficiency gains from switching to sealed bids from an open auction accrue to both sellers and the buyer, so that all concerned parties would agree to the change. A direct application of the theory is to procurement, the heavy use of sealed bidding in procurement is seen as rational in light of these results. Auction models with endogenous quantity could be an alternative to price-setting oligopoly models for the study of price formation in general, for the latter impose strong information requirements on agents and yield only equilibrium price vectors, not equilibrium processes for determining prices.

SEALED‐BID VERSUS OPEN AUCTIONS: THE EVIDENCE

Data from U.S. Forest Service timber auctions are used to test Vickrey's original proposition that sealed‐bid and open auctions yield equal revenue. Models for the high‐bid in an auction are specified and estimated using three different procedures: ordinary least squares, two stage least squares, and maximum likelihood. The second two procedures include a second equation which accounts for the Forest Service's auction choice and therefore control for selection bias. These two procedures, which unlike ordinary least squares yield consistent estimators, imply a statistically and economically insignificant difference in high‐bids between sealed‐bid and open auctions.

Rent-seeking, noncompensated transfers, and laws of succession: A property rights view

The modern theory of rent-seeking begun by Tullock, advanced by Krueger and Posner, and since carried on by others1, has largely been developed with reference to competition for monopoly rents created by governmentally enforced barriers to competition. The fundamental insight of Tullock was simply that resources would be expended to obtain the wealth transfers anticipated to accrue to monopolists. Given the reasonable assumption that rent-seekers do not value acquisition expenditures per se, barriers to entry can be considered socially costly, not only because they limit exchange and the gains therefrom, but also because the anticipated transfer of wealth from consumers to producers is absorbed, partially or wholly, in their acquisition. Even if the monopoly rights were sold at open auction by government agents so that competitors for the monopoly position transfer any anticipted rents to these agents, rent-seeking continues. It continues in the competition to obtain these rents from the government because no individual has an indisputable claim on them. As is clearly indicated in the literature2 the term rent-seeking must be used with some caution since it can also refer to activity that is not considered socially undesirable. An entrepreneur can gain rents not only by obtaining artificial entry restrictions, but also, for example, by offering superior value via product innovation. With product innovation, imitation and entry ultimately eliminate rents; whereas, barriers bring the process of competition to a halt. The distinction that emerges between socially desirable and undesirable rent-seeking is that the latter seeks to obtain wealth without offering anything in return to the party who surrenders the wealth; that is, undesirable rent-seeking involves an uncompensated transfer of wealth. Given this distinction, Buchanan's3 extension of this line of analysis to private