Auctions

Paul Klemperer is the Edgeworth Professor of Economics at Oxford University and a Fellow of the British Academy and of the Econometric Society.

• PREFACE ix INTRODUCTION 1 Part A: Introduction to the Theory 1: A SURVEY OF AUCTION THEORY 9 1.1 INTRODUCTION 9 1.1.1 Plan of this chapter 10 1.1.2 The standard auction types 11 1.1.3 The basic models of auctions 12 1.1.4 Bidding in the standard auctions 13 1.1.5 Terminology 14 1.2 EARLY LITERATURE 15 1.3 INTRODUCTION TO THE RECENT LITERATURE 16 1.4 THE BASIC ANALYSIS OF OPTIMAL AUCTIONS, REVENUE EQUIVALENCE, AND MARGINAL REVENUES 16 1.5 RISK-AVERSION 19 1.6 CORRELATION AND AFFILIATION 20 1.7 ASYMMETRIES 21 1.7.1 Private value differences 22 1.7.2 Almost-common-values 23 1.7.3 Information advantages 24 1.8 ENTRY COSTS AND THE NUMBER OF BIDDERS 25 1.8.1 Endogenous entry of bidders 25 1.8.2 The value of additional bidders 27 1.8.3 Information aggregation with large numbers of bidders 27 1.8.4 Unknown number of bidders 28 1.9 COLLUSION 28 1.10 MULTI-UNIT AUCTIONS 29 1.10.1 Optimal auctions 29 1.10.2 Simultaneous auctions 30 1.10.3 Sequential auctions 31 1.10.4 Efficient auctions 33 1.11 ROYALTIES, INCENTIVES CONTRACTS, AND PAYMENTS FOR QUALITY 34 1.12 DOUBLE AUCTIONS, ETC. 35 1.12.1 Double auctions 35 1.12.2 Related two-sided trading mechanisms 36 1.13 OTHER TOPICS 36 1.13.1 Budget constraints 37 1.13.2 Externalities between bidders 37 1.13.3 Jump bidding 38 1.13.4 The war of attrition 38 1.13.5 Competing auctioneers 39 1.14 TESTING THE THEORY 39 1.15 CONCLUSION 39 APPENDIX 1.A: THE REVENUE EQUIVALENCE THEOREM 40 1.B: MARGINAL REVENUES 44 1.C: AFFILIATED SIGNALS 48 1.D: EXAMPLES USING THE UNIFORM DISTRIBUTION 51 1.E: BIBLIOGRAPHY 57 AFTERWORD 62 EXERCISES 66 Part B: Applications to Other Areas of Economics 2: WHY EVERY ECONOMIST SHOULD LEARN SOME AUCTION THEORY 75 2.1 INTRODUCTION 76 2.2 USING AUCTION-THEORETIC TOOLS IN ECONOMICS: THE REVENUE EQUIVALENCE THEOREM 77 2.2.1 Comparing litigation systems 78 2.2.2 The war of attrition 79 2.2.3 Queuing and other "all-pay" applications 81 2.2.4 Solving for equilibrium behavior: market crashes and trading "frenzies" 81 2.3 TRANSLATING LOOSER ANALOGIES FROM AUCTIONS INTO ECONOMICS: ASCENDING VS. (FIRST-PRICE) SEALED-BID AUCTIONS 84 2.3.1 Internet sales vs. dealer sales 84 2.3.2 Anglo-Dutch auctions, a theory of rationing, and patent races 88 2.4 EXPLOITING DEEPER CONNECTIONS BETWEEN AUCTIONS AND ECONOMICS: MARGINAL REVENUES 89 2.5 APPLYING AUCTION THEORY TO PRICE-SETTING OLIGOPOLIES 92 2.5.1 Marginal-cost pricing is NOT the unique Bertrand equilibrium 92 2.5.2 The value of new consumers 93 2.5.3 Information aggregation in perfect competition 95 2.6 APPLYING AUCTION THEORY (AND ECONOMICS) TO AUCTION MARKETS 95 2.6.1 Important auction markets 96 2.6.2 Applying economics to auction design 97 2.7 CONCLUSION 98 APPENDIX 2.A: COMPARING LITIGATION SYSTEMS 99 2.B: DIRECT PROOF OF MONOPOLY-THEORETIC VERSION OF PROPOSITION IN SECTION 2.4 100 Part C: Practical Auction Design 3: WHAT REALLY MATTERS IN AUCTION DESIGN 103 3.1 INTRODUCTION 103 3.2 COLLUSION 104 3.3 ENTRY DETERRENCE AND PREDATION 106 3.4 OTHER PITFALLS 109 3.4.1 Reserve prices 109 3.4.2 Political problems 109 3.4.3 Loopholes 110 3.4.4 Credibility of the rules 111 3.4.5 Market structure 112 3.4.6 When is auction design less important? 113 3.5 SOLUTIONS 113 3.5.1 Making the ascending auction more robust 113 3.5.2 Using sealed-bid auctions 114 3.5.3 The Anglo-Dutch auction 116 3.5.4 Antitrust 117 3.6 TAILORING AUCTION DESIGN TO THE CONTEXT 119 3.7 CONCLUSION 121 4: USING AND ABUSING AUCTION THEORY 123 4.1 INTRODUCTION 123 4.2 THE RECEIVED AUCTION THEORY 126 4.2.1 Relevance of the received theory 127 4.3 THE ELEMENTARY ECONOMIC THEORY THAT MATTERS 131 4.3.1 Entry 131 4.3.2 Collusion 135 4.4 ROBUSTNESS TO POLITICAL PRESSURES 138 4.4.1 Economic similarity-political similarity 139 4.5 UNDERSTANDING THE WIDER CONTEXT 143 4.6 USING ECONOMIC THEORY 145 4.6.1 Do e-commerce and m-commerce raise consumer prices? 145 4.7 CONCLUSION 147 Part D: Case Study: The "3G" Mobile-Phone Auctions 5: OVERVIEW OF THE EUROPEAN AUCTIONS 151 5.1 INTRODUCTION 151 5.2 WHAT REALLY MATTERS IN AUCTION DESIGN? 152 5.3 THE YEAR 2000 SIMPLE ASCENDING AUCTIONS: THE UNITED KINGDOM, NETHERLANDS, ITALY, AND SWITZERLAND 153 5.3.1 The UK auction (March-April 2000) 153 5.3.2 The Netherlands auction (July 2000) 155 5.3.3 The Italian auction (October 2000) 156 5.3.4 The Swiss auction (November/December 2000) 157 5.4 THE YEAR 2000 "VARIABLE-PRIZE" ASCENDING AUCTIONS: GERMANY AND AUSTRIA 158 5.4.1 The German auction (July-August 2000) 158 5.4.2 The Austrian auction (November 2000) 160 5.5 BIDDERS' VALUATIONS OF LICENSES 161 5.6 THE YEAR 2001 AUCTIONS 162 5.6.1 The Belgian and Greek auctions (March and July 2001) 162 5.6.2 The Danish auction (September 2001) 163 5.7 HOW DID THE SEQUENCING MATTER? 164 5.7.1 Learning to play the game 164 5.7.2 Learning opponents' valuations 164 5.7.3 Complementarities 166 5.7.4 Budget constraints 166 5.8 CONCLUSION 166 6: DESIGNING THE UK AUCTION 168 6.1 BACKGROUND 169 6.2 AUCTIONS VS. BEAUTY CONTESTS 170 6.2.1 Arguments for auctions 170 6.2.2 Popular objections to auctions 171 6.3 AIMS OF THE AUCTION 174 6.4 MAIN ISSUES 175 6.4.1 The problem of entry 175 6.4.2 Royalties or lump sum payments? 176 6.4.3 How many licenses? 177 6.4.4 Legal issues 178 6.5 AUCTION DESIGNS 178 6.5.1 The Anglo-Dutch design 178 6.5.2 The simultaneous ascending design 181 6.6 OTHER ISSUES 183 6.6.1 Roaming 183 6.6.2 Associated bidders 184 6.6.3 The Vodafone-Mannesmann takeover 185 6.7 ASSESSMENT 186 6.7.1 The auction outcome 186 6.7.2 Mistakes 188 6.7.3 Telecom auctions elsewhere 189 6.8 CONCLUSION 191 7: BIDDER STRATEGIES 192 7.1 INTRODUCTION (TO DISCUSSION OF THE UK AUCTION) 192 7.2 EFFICIENCY OF THE UK AUCTION 192 7.3 BT'S BIDDING BEHAVIOR 193 7.4 INTRODUCTION (TO DISCUSSION OF THE GERMAN AUCTION) 196 7.5 THE GERMAN AUCTION 198 7.6 GRW'S ANALYSIS OF THE GERMAN AUCTION 199 7.7 WHAT ACTUALLY HAPPENED IN THE GERMAN AUCTION? 202 7.8 A RELATIVE PERFORMANCE MAXIMIZING THEORY OF THE GERMAN AUCTION 202 7.9 THE AUSTRIAN AND SWISS AUCTIONS 205 7.10 THE IMPORTANCE OF ENTRY, AND THE UK AUCTION 206 8: WERE AUCTIONS A GOOD IDEA? 207 SUGGESTIONS FOR COURSE OUTLINES 210 SOLUTIONS TO EXERCISES 212 REFERENCES 223 INDEX 241

"As a leader in auction-theory research and as a leading practitioner of auction design, Paul Klemperer is the best person to write the definitive book on auctions in theory and practice. This book ties together material on what economists should learn from auction theory, and on what auction theorists should learn from practical experience in auction design." - Roger B. Myerson, University of Chicago; "Paul Klemperer is one of the leaders in auction design worldwide. His emphasis in recent years on some of the more practical aspects of the theory - how to attract bidders, how to avoid collusion, how to think about government policy goals in designing public auctions - is particularly innovative. Klemperer's work will be very influential in the coming years." - Jeremy Myorson, Stanford University"