Strategic Demand Reduction in homogenous multiunit auctions (where bidders may be interested in more than one unit)

1
Strategic Demand Reduction in homogenous
multiunit auctions (where bidders may be
interested in more than one unit)
2
How does the homogenous multi-unit auction
mechanisms work?

• Three common auction mechanisms
• Pay-as-you bid auction
• Uniform price auction
• Simultaneous ascending-bid auction

3
Pay-as-you-bid auction

• Bidders each submit bids for various quantities
  at various prices,
• the auctioneer determines the market-clearing
  price,
• all bids exceeding the market-clearing price are
  accepted, and bidders
• pay their winning bids.

4
Uniform price auction

• Bidders each submit bids for various quantities
  at various prices,
• the auctioneer determines the market-clearing
  price, all bids exceeding the market-clearing
  price are accepted
• bidders pay the market-clearing price for all
  units won, rather than their actual bids.
• Like in second price sealed bid auction
• Though efficiency cannot compared to single unit
  second price sealed bid auction

5
Activity English Auction of Jar containing
Coins

• Rules/Things you should know about
• This is a common value ascending auction
• No collusive bidding is allowed
• Do not Jump-Bid, this undermines the entire thing
• Everybody is supposed to observe the bidding
  process carefully and learn about others
  valuations from it.
• You should try to make a profit, if possible
• The main objective is iterative price discovery
  of an items of unknown value (Common Value)

6
Is the English auction of an item equivalent to
second-price sealed bid auction? Why?

• Depends on the item being auctioned
• It is not different in a private value case, Why?
• Your valuations arent influenced by the
  valuations of others just like in a second price
  sealed bid auction

7
Advantages of English Auction in a common value
setting

• Multiple rounds enable price discovery
• Helps Reduce winners curse
• Enables you to change your valuations/discover
  prices on the fly

8
Brain Teaser / Discussion

• How about related items (substitutes/compliments)
  being auctioned of concurrently using an English
  auction?
• What is the optimal bidding strategy?
• What advantage does the bidder have?

9
Simultaneous Ascending bid auctions

• Basic features
• allocates a set of M related goods among N agents
  via separate, concurrent English auctions for
  each good (MltN)
• Each auction may undergo multiple rounds of
  bidding

10
The most essential difference between multi and
single unit auctions

• Diminishing marginal utility of each extra item
  should be taken into account
• Definition (watered down) There is a decline in
  the marginal utility that person derives from
  consuming each additional unit of that product.
• This is the premise on which buffet-style
  restaurants operate. They entice you with "all
  you can eat," all the while knowing each
  additional plate of food provides less utility
  than the one before. And despite their
  enticement, most people will eat only until the
  utility they derive from additional food is
  slightly lower than the original
• Hence the marginal value of the second item in
  the auction may be lower than first one which
  implies that a bidder may not pay as much for the
  second as the first.

11
Demand and Supply of an arbitrary commodity

• An Illustration

PE is the equilibrium price QE is the equilibrium
qty
Supply
PE

• Reduction in demand
• Price drops
• Qty drops

QE
12
Demand and Supply curves in a homogenous
multiunit auction

• An Illustration

PE is the equilibrium price QE is the equilibrium
qty
Supply
PE

• Reduction in demand
• Price drops
• Qty remains the same

QE gt 1
13
Strategic Demand Reduction

• We have some control over the prices because we
  are the market
• Sometimes an agreement with other bidders are
  reached during the bidding process. ("If you give
  me what I want, Ill leave you alone in the next
  round)
• Similar happened in 1994 FCC broadband spectrum
  auctions
• In round 11, PageNet decided to cutback from
  bidding on 3 large licenses to 2 . Why?
• In uniform price auctions this will help one save
  on inframarginal (the number of items that you
  absolutely need) items.

14
How can one exploit this to bidders advantage?
15
A couple of questions?

• Does RET hold in a multiunit auction where
  bidders are interested in more than one item? Why
  so?
• Answer in Appendix A of the paper due today
• Which one would dominate in terms of expected
  revenues?
• Depends
• The goods being auctioned (whether they are
  substitutes or complements or totally unrelated)
• The number of bidders in the market.
• Simultaneous Ascending bid auction has had a lot
  of success with the FCC spectrum auctions
• The main reason being, bidders having access to
  preferences of other bidders during the bidding
  process

16
Conclusion

• Must take other bidders demands into
  consideration
• Failure to do so will drive up the prices to
  unfavorable levels for all participating parties
• This is one way everybody is better of!

17
References

• Klemperer, P. 1999. Auction theory A guide to
  the literature. Journal of Economic Surveys.
• Weber, R. J. 1997. Making more from less
  Strategic demand reduction in the FCC spectrum
  auctions. Journal of Economics and Management
  Strategy 6(3)529548.
• Stone, P. 2002. Randomized Strategic Demand
  Reduction ACM transactions
• Crampton, 1995. Journal of Economics and
  Management Strategy
• Crampton, 2005.
• Many more