Practical Auction Design Peter Cramton Professor of Economics, - - PowerPoint PPT Presentation

Practical Auction Design

Peter Cramton

Professor of Economics, University of Maryland Chairman, Market Design Inc. President, Criterion Auctions 14 July 2006

Introduction

• Auction design

– Government perspective (design) – Bidder perspective (strategy)

• Based on my experience

– Researching auctions – Advising governments (a dozen) – Advising bidders (more than two dozen)

Advising bidders

Advising bidders: Typical project

• Comment on auction design (regulatory)
• First strategy meeting

– Objectives – Strategic issues

• Develop bid tracking tool
• Second strategy meeting

– Development of strategy – Several mock auctions

• Daily auction advice during auction

– Comment on auction strategy and end-of-day report

Fundamental strategic issues

Exercise

• Two bidders (L & R), two items (A &B)

– L need both (value = 2 times birth month) – R needs one (value = birth month)

• Three auction formats

– First price – Second price – Simultaneous ascending auction

Exposure problem

Exposure problem

• With complements, bidding on individual

lots is risky

– Bidder must “go for it” or drop out early – Outcome is often inefficient – Experiments sometimes get high revenues

• Exposure problem eliminated with

package bids

Exposure problem exercise: Optimal strategy in SAA

• 12
• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 2 4 6 8 10 12 14 16 18 20 22 24 1 2 3 4 5 6 7 8 9 10 11 12 1 3 2 5 3 7 4 9 5 11 6 13 7 15 8 17 9 19 10 21 11 23 12 25 14 Cost to eliminate bidder R Expected Cost Bidder R's birth month L's value L's Profit L's birth month

Exposure problem exercise

Optimal Near Opt VL/2 A B VR A B Bad Strat VL/2 A B VR A B 1 1 0.5 1 1 1 1 1 3 3 3 3 4 2 3 4 3 3 5 3 6 6 6 10 8 6 8 8 10 10 8 8 8 10 10 8 10 10 10 11 9 9 9 11 10 9 10 10 11 11 11 10 10 11 5.5 11 13 11 11 11 11 8 8 11 10 10 First Price Second Price Bidder L Bidder R Bidder L Bidder R TU Berlin, 14 July 2006

Exposure problem exercise

Optimal Near Opt VL/2 A B VR A B Bad Strat VL/2 A B VR A B 1 0.01 0.01 1 0.99 1 3 1 1 2 0.9 0.9 3 2.5 2 1 1 3 3 3 2.99 2.99 4 0.5 3 3 2.99 2.99 4 0.5 3.5 4 3 3 5 2 2 4 3.95 3.95 5 3 3 4 2 3 5 3.5 4 4 4 5 5 4 3 3 5 2 3 4 4 4 5 5 3 5 5 4 6 0.6 1.6 5 10 10 6 6 7 7 7 7 4 7 7 7 7 7 8 4 4 8 6 8 8 8 8 8 9 1.5 1.5 8 6.01 9 3 3 8 8 12 10 10 8 7 12 12 12 8 8 9 7 9 9 10 7 3 10 4 10 12 4.07 8.05 12 12 6 12 8 12 12 AGATE, 4 July 2006 First Price Second Price Bidder L Bidder R Bidder L Bidder R

Exposure problem exercise

Optimal Near Opt VL A B VR A B Bad Strat VL A B VR A B 1 0.45 0.45 1 0.95 1 0.45 0.45 1 1 3 1 0.75 3 6 6 1 1 4 3 3 3 3 4 4 3 3 4 2.45 2.45 4 3.5 4 4 2.97 2.97 4 4 3.5 4 4 2.5 4 4 4 6 3 3 7 7 6 4 4 7 7 6 8 6.01 6 8 8.01 2.01 8 7 7 9 8.11 8 16 16 9 9 5 8 7 7 9 5 8 7 7 9 8 9 15 15 11 10 1 9 18 18 11 11 9 11 10 9 11 11 9 11 10 9 11 11 10 9.2 7.2 10 10.1 10 10 10 10 10 11 12 1 11 11 11 Second Price First Price Bidder L Bidder R Bidder L Bidder R Ofcom, Summer 2006

Objectives

Government goals

• Competition in post-auction market
• Efficiency
• Revenue

Bidder preferences

Bidder preferences

• Substitutes
• Complements
• Heterogeneity
• Externalities

Simultaneous ascending auction

Auction rules

• Simultaneous

– All lots at the same time

• Ascending

– Can raise bid on any lot

• Stopping rule

– All lots open until no bids on any lot

• Activity rule

– Must be activity to maintain eligibility

Strategy in SAA

Strategy in SAA

• Translating valuations into strategy
• Auction as a negotiation
• Elements of a good strategy
• Retaliation
• Managing eligibility
• Auction opening
• Stage transitions
• Auction closing

Auction as a Negotiation

• Learn what competitors need
• Learn how costly it is to ask for more
• Ask for more at the right time in the right

place

• Manage eligibility

Elements of a Good Strategy

• Conservative (don’t leave money on table)
• Flexible (responsive to others)
• Clear
• Nice, but firm

– Begin with a cooperative position – “Quick to punish, quick to forgive”

Retaliation

Retaliatory Bidding

• Stake a claim

– Bid early on licenses of primary interest – Consistently retake license whenever bumped

• Punish intruders

– Punish by bumping intruder from a license it holds – Works well against rivals with primary interests that overlap with your secondary interests

Example of Code Bidding

Marshalltown, IA Rochester, MN Waterloo, IA 283 E 378 D 452 E Round McLeod USWest McLeod USWest AT&T McLeod USWest 24 56,000 287,000 … … … 46 568,000 52 689,000 55 723,000 58 795,000 59 875,000 313,378 60 345,000 62 963,000 64 62,378 1,059,000 65 69,000 68 371,000

Critical times

Critical times

• Auction opening
• Stage transitions
• Auction closing

Bidder decision making

Bidder decision making

• Valuation model
• Competitor analysis
• Bid tracking tool
• Residual supply
• Communication with investors
• Deviations from rational bidding

Valuation model

• Typically complex spreadsheet, calculating

cost and revenues over 10 year horizon (NPV)

• Most sophisticated models reconfigure

network in response to extra spectrum

Bid tracking tool

Bid tracking tool: Access and Excel

• Import round (download results)
• Market analysis
• Bidder analysis
• Bid form (upload bids)
• Map
• Rounds summary
• Market pivot table
• Bidder pivot table

Round results Ranking

Minimum bid Must bid Tim Omnitel Blu Wind Ipse Andala 1 2 3 4 5 6 400 400 400 400 400 400 400 Ipse 400 Omnitel 400 Tim 400 Blu 400 Wind 400 Andala 400 1 420 Andala 400 400 400 420 400 420 Andala 420 Wind 420 Ipse 400 Omnitel 400 Tim 400 Blu 400 2 420 Blu 400 423 421 422 400 420 Omnitel 423 Wind 422 Blu 421 Andala 420 Ipse 400 Tim 400 3 420 Tim 422 425 421 422 422 420 Omnitel 425 Wind 422 Tim 422 Ipse 422 Blu 421 Andala 420 4 443 Andala 422 425 421 422 422 443 Andala 443 Omnitel 425 Wind 422 Tim 422 Ipse 422 Blu 421 5 443 Blu 422 425 444 422 422 443 Blu 444 Andala 443 Omnitel 425 Wind 422 Tim 422 Ipse 422 6 444 Ipse 422 425 444 422 445 443 Ipse 445 Blu 444 Andala 443 Omnitel 425 Wind 422 Tim 422 7 444 Tim 444 448 449 447 445 446 Blu 449 Omnitel 448 Wind 447 Andala 446 Ipse 445 Tim 444 8 468 Tim 468 448 449 447 468 446 Tim 468 Ipse 468 Blu 449 Omnitel 448 Wind 447 Andala 446 9 470 Andala 468 448 449 470 468 470 Wind 470 Andala 470 Tim 468 Ipse 468 Blu 449 Omnitel 448 10 472 Omnitel 468 474 449 470 473 470 Omnitel 474 Ipse 473 Wind 470 Andala 470 Tim 468 Blu 449 11 492 Blu

STRATEGY ROUND 11

Basic/Enhanced relates to

E2 Blu

= lowest {Blu, Ipse, Andala}

E1 Andala

= 2nd lowest {Blu, Ipse, Andala} Minumum Bid 492 JUMP WARNINGS INACTIVITY WARNINGS NEW ENTRANTS & BLU COMPARISON OPI position round bidder TIM for 2 rounds BLU not moved above Andala for 1 round Rationale (Enhanced default strategy) BLU for 3 rounds BLU not moved above Ipse for 2 rounds Epsilon Basic bid + epsilon No bid Net value of extra bid N/A Extra bid Enhanced bid No bid Enhanced bid + epsilon No bid Pr(Andala quits before Ipse) 0.50 Pr(Blu quits before Ipse) Pr(Blu quits before Andala) 0.50 END GAME STRATEGY (suggestion) Suggest high pr(Blu quits before Ipse) and high pr(Blu quits before Andala) No bid. Case 11: Do not have to bid, above E1.

• Highest. Above Ipse, Andala and Blu.

jump Suggested bid BLU+1 No bid BLU failed to move above Andala for 1 round. BLU failed to move above Ipse for 2 rounds. BLU inactive for 3 rounds. 0.50

Italy 3G

German 3G (Debitel out; Mobilcom to 2)

Rnd Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder 121 4.652 T-Mob 4.663 Group 4.535 e-Plus 4.452 Manne 4.300 Debite 4.269 Mobilco4.432 Mobilco4.421 Viag 4.429 e-Plus 4.538 T-Mob 4.497 Manne 4.534 Group 122 4.652 T-Mob 4.663 Group 4.535 e-Plus 4.452 Manne 4.730 Viag 4.700 Mobilco4.432 Mobilco4.870 Debite 4.429 e-Plus 4.538 T-Mob 4.497 Manne 4.534 Group 123 4.652 T-Mob 4.663 Group 4.535 e-Plus 4.897 Debite 4.730 Viag 4.700 Mobilco4.880 Mobilco4.870 Debite 4.872 Manne 4.538 T-Mob 4.497 Manne 4.534 Group 124 4.652 T-Mob 4.663 Group 4.535 e-Plus 4.897 Debite 4.730 Viag 4.700 Mobilco4.880 Mobilco4.870 Debite 4.872 Manne 4.538 T-Mob 4.947 T-Mob 4.987 Manne 125 5.117 e-Plus 5.130 e-Plus 4.989 e-Plus 4.897 Debite 4.730 Viag 4.700 Mobilco4.880 Mobilco4.870 Debite 4.872 Manne 4.992 Viag 4.947 T-Mob 4.987 Manne 126 5.117 e-Plus 5.130 e-Plus 4.989 e-Plus 5.400 Mobilco5.203 Group 5.200 Mobilco5.368 T-Mob 5.357 Group 4.872 Manne 4.992 Viag 4.947 T-Mob 4.987 Manne 127 5.117 e-Plus 5.130 e-Plus 5.488 Manne 5.400 Mobilco5.203 Group 5.200 Mobilco5.368 T-Mob 5.357 Group 5.360 Group 4.992 Viag 4.947 T-Mob 5.486 Viag 128 5.117 e-Plus 5.130 e-Plus 5.488 Manne 5.400 Mobilco5.203 Group 5.200 Mobilco5.368 T-Mob 5.357 Group 5.360 Group 5.491 Manne 5.500 Mobilco5.486 Viag 129 5.629 Viag 5.643 T-Mob 5.488 Manne 5.400 Mobilco5.203 Group 5.720 e-Plus 5.368 T-Mob 5.357 Group 5.360 Group 5.491 Manne 5.500 Mobilco5.486 Viag 130 5.629 Viag 5.643 T-Mob 5.488 Manne 5.400 Mobilco5.724 Manne 5.720 e-Plus 5.368 T-Mob 5.357 Group 5.896 T-Mob 5.491 Manne 5.500 Mobilco5.486 Viag 131 5.629 Viag 5.643 T-Mob 6.060 Group 5.400 Mobilco5.724 Manne 5.720 e-Plus 6.060 Group 5.893 e-Plus 5.896 T-Mob 5.491 Manne 5.500 Mobilco5.486 Viag 132 5.629 Viag 5.643 T-Mob 6.060 Group 5.940 Manne 5.724 Manne 5.720 e-Plus 6.060 Group 5.893 e-Plus 5.896 T-Mob 6.041 e-Plus 6.060 T-Mob 6.050 Mobilco 133 6.200 Mobilco6.207 Viag 6.060 Group 5.940 Manne 5.724 Manne 6.297 Manne 6.060 Group 5.893 e-Plus 5.896 T-Mob 6.041 e-Plus 6.060 T-Mob 6.050 Mobilco 134 6.200 Mobilco6.207 Viag 6.060 Group 5.940 Manne 6.296 e-Plus 6.297 Manne 6.060 Group 5.893 e-Plus 5.896 T-Mob 6.041 e-Plus 6.060 T-Mob 6.050 Mobilco 135 6.200 Mobilco6.207 Viag 6.060 Group 5.940 Manne 6.296 e-Plus 6.297 Manne 6.060 Group 6.482 Mobilco5.896 T-Mob 6.041 e-Plus 6.060 T-Mob 6.050 Mobilco 136 6.200 Mobilco6.207 Viag 6.060 Group 6.666 T-Mob 6.296 e-Plus 6.297 Manne 6.060 Group 6.482 Mobilco6.485 e-Plus 6.041 e-Plus 6.060 T-Mob 6.050 Mobilco 137 6.200 Mobilco6.207 Viag 6.060 Group 6.666 T-Mob 6.296 e-Plus 6.297 Manne 6.666 T-Mob 6.482 Mobilco6.485 e-Plus 6.645 Viag 6.060 T-Mob 6.666 Manne 138 6.200 Mobilco6.207 Viag 6.696 Group 6.666 T-Mob 6.296 e-Plus 6.297 Manne 6.666 T-Mob 6.482 Mobilco6.485 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 139 6.510 T-Mob 6.517 Mobilco6.696 Group 6.666 T-Mob 6.296 e-Plus 6.297 Manne 6.666 T-Mob 6.482 Mobilco6.485 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 140 6.510 T-Mob 6.517 Mobilco6.696 Group 6.666 T-Mob 6.611 e-Plus 6.297 Manne 6.666 T-Mob 6.482 Mobilco6.485 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 141 6.510 T-Mob 6.517 Mobilco6.696 Group 6.666 T-Mob 6.611 e-Plus 6.612 Viag 6.666 T-Mob 6.806 Mobilco6.485 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 142 6.836 Manne 6.844 Manne 6.696 Group 6.666 T-Mob 6.611 e-Plus 6.612 Viag 6.666 T-Mob 6.806 Mobilco6.810 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 143 6.836 Manne 6.844 Manne 6.696 Group 6.666 T-Mob 6.942 e-Plus 6.950 Mobilco6.666 T-Mob 6.806 Mobilco6.810 e-Plus 6.645 Viag 6.696 Group 6.666 Manne 144 6.836 Manne 6.844 Manne 6.696 Group 6.666 T-Mob 6.942 e-Plus 6.950 Mobilco6.666 T-Mob 6.806 Mobilco6.810 e-Plus 6.645 Viag 6.696 Group 7.000 T-Mob 145 6.836 Manne 6.844 Manne 6.696 Group 6.666 T-Mob 6.942 e-Plus 6.950 Mobilco6.999 Viag 7.147 Manne 6.810 e-Plus 6.645 Viag 6.696 Group 7.000 T-Mob 146 6.836 Manne 6.844 Manne 6.696 Group 7.000 Mobilco6.942 e-Plus 7.298 T-Mob 6.999 Viag 7.147 Manne 6.810 e-Plus 6.645 Viag 6.696 Group 7.000 T-Mob 147 6.836 Manne 6.844 Manne 6.696 Group 7.000 Mobilco6.942 e-Plus 7.298 T-Mob 6.999 Viag 7.147 Manne 6.810 e-Plus 7.002 T-Mob 6.696 Group 7.000 T-Mob 148 6.836 Manne 6.844 Manne 7.032 Mobilco7.000 Mobilco6.942 e-Plus 7.298 T-Mob 6.999 Viag 7.147 Manne 6.810 e-Plus 7.002 T-Mob 7.031 Viag 7.000 T-Mob 149 7.178 Group 7.186 Group 7.032 Mobilco7.000 Mobilco6.942 e-Plus 7.298 T-Mob 6.999 Viag 7.147 Manne 6.810 e-Plus 7.002 T-Mob 7.031 Viag 7.000 T-Mob 150 7.178 Group 7.186 Group 7.032 Mobilco7.350 Mobilco7.290 Manne 7.298 T-Mob 6.999 Viag 7.147 Manne 7.151 Manne 7.002 T-Mob 7.031 Viag 7.000 T-Mob 151 7.178 Group 7.186 Group 7.032 Mobilco7.350 Mobilco7.290 Manne 7.298 T-Mob 6.999 Viag 7.504 e-Plus 7.151 Manne 7.002 T-Mob 7.031 Viag 7.350 e-Plus 152 7.178 Group 7.186 Group 7.032 Mobilco7.350 Mobilco7.290 Manne 7.298 T-Mob 7.349 T-Mob 7.504 e-Plus 7.151 Manne 7.367 Manne 7.031 Viag 7.350 e-Plus 153 7.178 Group 7.186 Group 7.384 Viag 7.350 Mobilco7.290 Manne 7.298 T-Mob 7.349 T-Mob 7.504 e-Plus 7.151 Manne 7.367 Manne 7.387 T-Mob 7.350 e-Plus 154 7.178 Group 7.545 Mobilco7.384 Viag 7.350 Mobilco7.290 Manne 7.298 T-Mob 7.349 T-Mob 7.504 e-Plus 7.508 Viag 7.367 Manne 7.387 T-Mob 7.350 e-Plus 155 7.538 Manne 7.545 Mobilco7.384 Viag 7.350 Mobilco7.654 Group 7.298 T-Mob 7.349 T-Mob 7.504 e-Plus 7.508 Viag 7.367 Manne 7.387 T-Mob 7.350 e-Plus 156 7.538 Manne 7.545 Mobilco7.384 Viag 7.350 Mobilco7.654 Group 7.662 Group 7.349 T-Mob 7.504 e-Plus 7.508 Viag 7.367 Manne 7.387 T-Mob 7.350 e-Plus 157 7.538 Manne 7.545 Mobilco7.384 Viag 7.350 Mobilco7.654 Group 7.662 Group 7.717 Manne 7.504 e-Plus 7.508 Viag 7.735 T-Mob 7.387 T-Mob 7.350 e-Plus 158 7.538 Manne 7.545 Mobilco7.384 Viag 7.350 Mobilco7.654 Group 7.662 Group 7.717 Manne 7.504 e-Plus 7.508 Viag 7.735 T-Mob 7.387 T-Mob 7.717 Manne 159 7.538 Manne 7.545 Mobilco7.384 Viag 7.723 T-Mob 7.654 Group 7.662 Group 7.717 Manne 7.504 e-Plus 7.508 Viag 7.735 T-Mob 7.387 T-Mob 7.717 Manne 160 7.538 Manne 7.545 Mobilco7.384 Viag 7.723 T-Mob 7.654 Group 7.662 Group 7.717 Manne 7.504 e-Plus 7.884 Mobilco7.735 T-Mob 7.756 e-Plus 7.717 Manne Block 1 Block 2 Block 3 Block 4 Block 5 Block 6 Block 7 Block 8 Block 9 Block 10 Block 11 Block 12

German 3G

Rnd Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder Bid Bidder 161 7.538 Manne 7.545 Mobilco7.778 T-Mob 7.723 T-Mob 7.654 Group 7.662 Group 7.717 Manne 7.880 e-Plus 7.884 Mobilco7.735 T-Mob 7.756 e-Plus 7.717 Manne 162 7.915 Viag 7.930 Mobilco7.778 T-Mob 7.723 T-Mob 7.654 Group 7.662 Group 7.717 Manne 7.880 e-Plus 7.884 Mobilco7.735 T-Mob 7.756 e-Plus 7.717 Manne 163 7.915 Viag 7.930 Mobilco7.778 T-Mob 7.723 T-Mob 8.037 Viag 7.662 Group 7.717 Manne 7.880 e-Plus 7.884 Mobilco7.735 T-Mob 7.756 e-Plus 7.717 Manne 164 7.915 Viag 7.930 Mobilco7.778 T-Mob 7.723 T-Mob 8.037 Viag 8.046 Manne 8.141 Group 7.880 e-Plus 7.884 Mobilco7.735 T-Mob 7.756 e-Plus 7.717 Manne 165 7.915 Viag 7.930 Mobilco7.778 T-Mob 7.723 T-Mob 8.037 Viag 8.046 Manne 8.141 Group 7.880 e-Plus 7.884 Mobilco7.735 T-Mob 8.144 Manne 8.141 Group 166 7.915 Viag 7.930 Mobilco7.778 T-Mob 8.142 Manne 8.037 Viag 8.046 Manne 8.141 Group 8.274 e-Plus 7.884 Mobilco8.144 e-Plus 8.144 Manne 8.141 Group 167 8.310 Viag 7.930 Mobilco8.167 T-Mob 8.142 Manne 8.037 Viag 8.046 Manne 8.141 Group 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 168 8.310 Viag 8.170 Mobilco8.167 T-Mob 8.142 Manne 8.200 Mobilco8.046 Manne 8.141 Group 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 169 8.310 Viag 8.170 Mobilco8.167 T-Mob 8.142 Manne 8.200 Mobilco8.207 Viag 8.141 Group 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 170 8.310 Viag 8.170 Mobilco8.330 Manne 8.142 Manne 8.200 Mobilco8.207 Viag 8.141 Group 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 171 8.310 Viag 8.170 Mobilco8.330 Manne 8.142 Manne 8.200 Mobilco8.207 Viag 8.304 T-Mob 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 172 8.310 Viag 8.170 Mobilco8.330 Manne 8.305 Group 8.200 Mobilco8.207 Viag 8.304 T-Mob 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group 173 8.310 Viag 8.170 Mobilco8.330 Manne 8.305 Group 8.200 Mobilco8.207 Viag 8.304 T-Mob 8.274 e-Plus 8.278 T-Mob 8.144 e-Plus 8.144 Manne 8.141 Group Block 1 Block 2 Block 3 Block 4 Block 5 Block 6 Block 7 Block 8 Block 9 Block 10 Block 11 Block 12

Round Revenue Still to go Event 127 32.2 18.3 Debitel drops out (down to 6 bidders) 146 42.4 8.1 Common knowledge that MobilCom dropped to 2 173 50.5 0.0 End of auction

Deviations from rational bidding

• Too little demand reduction (too greedy)
• Lack of clarity (this is bridge not poker)
• Don’t recognize winner’s curse
• Retaliation either too weak or too strong
• Failure to recognize other options

– Secondary market – Subsequent offerings

Variations of SAA

Variations of SAA

• Anonymous bidding
• Abstract lots vs. specific lots

Simultaneous ascending auction

• Strengths

– Simple price discovery process – Allows arbitrage across substitutes – Piece together desirable packages – Reduces winner’s curse

• Weaknesses

– Demand reduction – Tacit collusion – Parking – Exposure – Hold up – Complex bidding strategies

Combinatorial auctions

• Threshold problem
• Reducing exposure and mitigating

threshold problem

• Alternative methods

– SAA with augmented switching – SAA with package bids – Clock auctions

Threshold problem

• In SAA with package bids, bidders on

individual lots may find it difficult to top a large package bid

– Each individual bidder hopes others will raise – Result may be that too few raise to top package even though individual bids are higher

Reducing exposure while mitigating the threshold problem

• Limit packages to lots where

complementaries are strong

• Eliminate jump bids
• Use clock auction to resolve negotiation

among bidders on individual lots

Alternative methods

• SAA with augmented switching
• SAA with package bids
• Clock auctions

SAA with augmented switching

SAA with package bids

• Highly complex if all packages allowed
• Threshold problem can be severe
• Prices don’t exist or are made up

A consistent family of auctions

• Clock auction
• Many variations allow customization to

particular auction

– Information policy – Activity rule – Final round

Advantages to a consistent family

• Design is easier

– Pick and choose from a menu

• Implementation is easier

– All designs built on same stable platform

• Bidder participation costs are reduced

– Bidders understand auction and variations

Clock-Proxy Auction

Clock auction

• Auctioneer names prices; bidders name
• nly quantities

– Price adjusted according to excess demand – Process repeated until market clears

• No exposure problem (package auction)

Proxy auction

• A sealed-bid procedure for package

bidding

• Bidders specify values
• Finds bidder-Pareto optimal point in Core

– Efficient assignment – Competitive revenues

Clock-proxy auction

• A clock auction followed by a final proxy

round

– Bidders directly submit bids in clock auction phase – When clock phase concludes, bidders have a single opportunity to input proxy values – Proxy phase concludes the auction

Clock-proxy auction

• All bids are kept “live” throughout auction

(no bid withdrawals)

• Bids from clock phase are also treated as

package bids in the proxy phase

• All bids are treated as mutually exclusive

(XOR)

• Activity rules are maintained within clock

phase and between clock and proxy phases

Advantages of clock-proxy auction

• Clock phase

– Simple for bidders – Provides price discovery – Interdependent values – Economize on package evaluation costs

• Proxy phase

– Efficient allocations – Competitive revenues – Reduces opportunities for collusion

Key issues and variations

• Making discrete rounds continuous
• Reducing exposure
• Promoting price discovery
• Reducing demand reduction

Price MW Aggregate Demand

Making discrete rounds continuous

Overshoot Closing Price: P6 Round 6 Round 5 P5 Round 4 P4 Round 3 P3 Round 2 P2 Round 1 P1 Supply

Round 6 Round 5 P6 Round 6 Round 5 P5 Round 4 P4 Round 3 P3 Round 2 P2 Round 1 P1 Price MW quantity bid by an individual

Making discrete rounds continuous

Price MW Aggregate Demand Supply Round 2 P2 Round 1 P1 Round 3 P3 Round 4 P4 Round 5 P5 Minimal Overshoot Closing Price P6 Round 6

Making discrete rounds continuous

Reducing exposure

• Treatment of bids that cause

demand < supply

– Ration or reject reduction

• Exposure problem
• Supply = demand

– Allow reduction

• No exposure problem
• Undersell

Promoting price discovery

• Revealed-preference activity rule

– Compare times s and t (s < t), Prices: ps, pt Demands: xs, xt – At time s, xs is better than xt: – At time t, xt is better than xs :

• Adding inequalities yields the RP activity rule:

( ) ( )

s s s t s t

v x p x v x p x − ⋅ ≥ − ⋅ ( ) ( )

t t t s t s

v x p x v x p x − ⋅ ≥ − ⋅

( ) ( ) ( ) 0 .

t s t s

RP p p x x − ⋅ − ≤

Reducing demand reduction

Theorem (Ausubel-Milgrom): Payoff vector resulting from proxy auction is in the core relative to the reported preferences.

• Interpretations

– Core outcome assures competitive revenues for seller – Core outcome assures allocative efficiency (ascending proxy auction is not subject to inefficient demand reduction)

Advantages of clock-proxy

• Clock

– Take linear prices as far as they will go – Simplicity and flexibility for bidders and auctioneer – Expand substitution possibilities – Minimize scope for collusion – No exposure problem; no threshold problem

• Proxy

– Core outcome – Efficiency – Substantial seller revenues