DESIGNED TO FAIL: THE MEDICARE AUCTION FOR DURABLE MEDICAL EQUIPMENT

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high‐cost firms potentially displace low‐cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median‐price auction with the standard clearing‐price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. (JEL D44, I11, H57)     

SOME EVIDENCE ON LATE BIDDING IN EBAY AUCTIONS

Bidding in the last seconds or minutes of an auction is a common strategy in Internet auctions with fixed end‐time. This paper examines the three explanations of late bidding in eBay auctions that survived the first scrutiny in Roth and Ockenfels (2002) . There is no indication that late bidding could lead to collusive gains for bidders. Late bidding is a strategic response to the presence of bidders placing multiple bids. Experts protecting their private information are typically the last to bid, while collectors are often the first. As bidders gain familiarity with eBay rules, they tend to bid slightly earlier. (JEL D44)     

PRICE ADJUSTMENT POLICIES AND FIRM SIZE

A number of U.S. State Departments of Transportation have adopted a price adjustment policy designed to limit cost fluctuations of oil‐based inputs in government procurement. Similar policies are common in defense contracting, and have been used to offset financial losses of health insurance companies in Medicare and the Affordable Care Act. We show that while all bidders submit lower bids after the policy is introduced, the extent of bid reduction diminishes with firm size. Small new firms are able to compete more frequently, promoting auction competition and efficiency. (JEL H4, H57, D44)     

CAPS IN SEQUENTIAL CONTESTS

We study a sequential two‐stage all‐pay auction with two identical prizes. In each stage, the players compete for one prize and each player can win either one or two prizes. The designer may impose a cap on the players' bids in each of the stages. We analyze the equilibrium in this sequential all‐pay auction with bid caps and show that capping the players' bids is profitable for a designer who wishes to maximize the players' expected total bid. (JEL D44, D82, J31, J41)     

THE BEHAVIOR OF INEXPERIENCED BIDDERS IN INTERNET AUCTIONS

In Internet auctions, bidders alter their strategies as they gain market experience. While inexperienced bidders bid the same high amounts regardless of the seller’s reputation, experienced bidders bid substantially less if the seller has yet to establish a reputation and raise their bids as reports are filed that the seller has treated bidders well in the past. Experienced bidders also wait until much closer to the end of the auction to place their bids, although it takes very little experience to learn that waiting to submit one’s bid is a superior strategy. (JEL L14, L15, D83, D12)     

IN SEARCH OF THE WINNER'S CURSE

Earlier papers on the winner's curse have provided theoretical arguments that winning bidders in an auction will incur ex post losses even when all bidders use reasonable ex ante bidding strategies. This paper demonstrates that these arguments are erroneous: optimal ex ante bidders will never suffer from a winner's curse in an auction where only the winning bid is announced; furthermore, such bidders will on the average not suffer from a winner's curse in an auction where all bids are announced. Thus if a winner's curse is a behavioral reality then bidders are not generally using ex ante optimal strategies.     

POTENTIAL COMPETITION AND POSSIBLE COLLUSION IN FOREST SERVICE TIMBER AUCTIONS

Potential competition significantly affects the size of winning bids in Forest Service sealed-bid timber auctions and has little effect on winning bids in oral auctions. Winning sealed bids depend even more, however, on actual competition, a result suggesting collusion. This explanation is supported using an index representing the likelihood an auction was rigged. Preclusive bidding (a type of collusion) in oral auctions is indicated by a positive relationship between hauling distances and the size of winning sealed bids. Comparisons of winning-bid variances, overbids, and numbers of bidders across auction type support this explanation of oral auction prices.     

A LABORATORY STUDY OF AUCTIONS WITH A BUY PRICE

We present a series of laboratory experiments that examine auctions with buy prices, which are prices that allow a bidder to stop the auction and buy the item immediately. Two types of buy prices are considered, one that is available throughout the auction and one that disappears with an initial bid. Both are evaluated with and without proxy bidding. We find that the use of a buy price increases revenue, early bidding, and auction efficiency. Differences between outcomes in auctions with permanent and temporary buy prices are consistent with the observed choices in auction design made by online auction sites. (JEL C90, D44, C70, L81)     

ROBUSTNESS OF BIDDER PREFERENCES AMONG AUCTION INSTITUTIONS

In previous work, we found that bidders strongly prefer the ascending to the first‐price sealed‐bid auction on a ceteris paribus basis, but perhaps surprisingly, they are not willing to pay up to an entry price for the ascending auction that would equalize the profits. Risk aversion was proposed as an explanation. In this study, we examine two alternative explanations for the observed behavior: loss aversion and aversion to the dynamic bidding process. We find that neither alternative explanation can account for bidders’ auction choice behavior, leaving risk aversion as the only unfalsified hypothesis. (JEL C91, D44)     

PRIZE‐BASED MECHANISMS FOR FUND‐RAISING: THEORY AND EXPERIMENTS

We study the optimal design of mechanisms for the private provision of public goods in a setting in which donors compete for a prize of commonly known value. We discuss equilibrium bidding in mechanisms that promote both conditional cooperation and competition (i.e., the lottery and the all‐pay auction with the lowest‐bid payment rule) and rank their fund‐raising performance vis‐à‐vis their standard (pay‐your‐own‐bid) counterparts. The theoretically optimal mechanism in this model is the lowest‐price all‐pay auction—an auction in which the highest bidder wins the prize and all bidders pay the lowest bid. The highest amount for the public good is generated in the unique, symmetric, mixed‐strategy equilibrium of this auction. In the laboratory, the theoretically optimal mechanism generates the highest level of donations with three bidders but not with two bidders. (JEL D44, D64)     

AUCTIONS WITH RESALE OPPORTUNITIES: AN EXPERIMENTAL STUDY

We study first price asymmetric private value auctions with resale opportunities presented in seller's and buyer's markets. We offer experimental evidence on bidding behavior, prices, and resource allocation. Building upon the Hafalir and Krishna (2008) model, we find that bidders will bid higher in an auction if the resale market is a seller's market than a buyer's market. There is a price/revenue‐efficiency trade‐off established theoretically between these two resale regimes. In equilibrium, however, final efficiency is high irrespective of the resale market structure. Evidence of bid symmetrization and higher final efficiency is found in the buyer‐advantaged resale case. (JEL D44, C92)     

ENTRY COORDINATION AND AUCTION DESIGN WITH PRIVATE COSTS OF INFORMATION ACQUISITION

Auction design with endogenous entry is complicated by entry coordination among bidders due to multiple entry equilibria issue. This article studies auction design when information acquisition costs are private information of bidders. We show that this problem can be resolved by sufficient dispersion in these costs. First, we find that a simple second‐price auction with no entry fee and a reserve price equal to the seller's valuation is ex ante efficient, while a revenue‐maximizing auction involves personalized entry fees, which are determined by the hazard rates of their information acquisition cost distribution. Second, we show that sufficient dispersion in the information acquisition costs (more dispersion than a particular uniform distribution by the Bickel‐Lehman dispersive order) can coordinate bidders and implement uniquely the desirable entry. The dispersion in information acquisition costs is also necessary for this “unique implementation” result. (JEL D44, D82)     

PROCUREMENT AUCTIONS WITH RENEGOTIATION AND WEALTH CONSTRAINTS

Renegotiation is a common practice in procurement auctions which allows for postauction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer. (JEL C91, D44, D82)     

INDIVIDUAL BEHAVIOR AND BIDDING HETEROGENEITY IN SEALED BID AUCTIONS WHERE THE NUMBER OF BIDDERS IS UNKNOWN

This article uses laboratory data from a series of first‐price (FP) and second‐price (SP) sealed bid auctions in which the number of bidders is unknown to test for possible deviations of individual behavior from theory and study the source of heterogeneity in bidding. In SP auctions we find a substantial amount of coincidence with theory. We observe systematic deviations from risk neutral bidding in FP auctions and show theoretically that these deviations are consistent with risk averse preferences. We find essentially no heterogeneity in bidding in SP auctions where risk preferences and the number of bidders do not affect the optimal bid, while in the FP auctions heterogeneity in bidding persists with experience. We find that heterogeneity in bidding in FP auctions is consistent with heterogeneity in risk preferences, the attempt to count the number of bidders in the auction, and bidder specific noise. (JEL D44, C91)     

Auctions of companies

Auctions of companies are conducted in ways that contradict received auction theory. The major puzzles are: (1) sellers restrict the number of bidders; (2) sellers restrict the number of bidders; (3) bidders are screened by an initial round of non-binding bids; and (4) bidders offer - and sellers sometimes accept - preemptive bids. Puzzles (1), (2), and (4) are explained by assuming that some information concerning the company can, if released, reduce the value of the company. Puzzle (3) is explained as a way for sellers to select the highest-valued bidders; equilibrium is maintained by using the initial bids to set a reserve price for the final bidding round.     

RISK AVERSION AND OVERBIDDING IN FIRST PRICE SEALED BID AUCTIONS: NEW EXPERIMENTAL EVIDENCE

Bidding above the risk‐neutral Nash equilibrium in first price sealed bid auctions has traditionally been ascribed to risk aversion. Later studies, however, offer other explanations and even argue that risk aversion plays no or a minor role. In a novel experimental design, we directly test the relationship between risk aversion and overbidding by systematically varying the distribution of risk attitudes in auction markets. We find a significant relationship between our measure of risk aversion and overbidding. (JEL D44, C91)     

LESSONS FROM A FAILED AIRLINE AUCTION

In 1995, USAir placed itself for sale in an English auction. Interestingly, no bids were placed. This does not imply that the available firm is not a valuable acquisition. If losing reduces profits, firms wish to avoid a profit-reducing bidding war. However, in a sealed-bid auction (with no credible nonparticipation commitments), firms place profit-reducing bids in equilibrium. Also, a novelty of our analysis is the specification of the loser's profit rising with the price that the winner pays. This highlights an important explanation of bidding wars because a firm may bid simply to make the eventual winner pay a higher price. ( JEL L1, L9)     

LABOR MARKET REGULATION AND THE WINNER'S CURSE

This paper analyzes the impact British Columbia's 1992 Skill Development and Fair Wage Policy (SDFWP) on bid price determination. Econometric analysis of the public school projects tendered between 1989 and 1995 shows that prior to the SDFWP, the common values auction model applied, and bidders facing higher competition surcharged cost estimates in order to avoid the winner s curse. After the SDFWP, collective uncertainty concerning wages declined, and the independent values model became relevant. During this period, bidders responded to rising competition by lowering their bids. This adjustment explains, at least in part, why wage regulation did not raise bid prices. ( JEL D44, J38, L74, H57)     

FIRST-PRICE COMMON VALUE AUCTIONS: BIDDER BEHAVIOR AND THE "WINNER'S CURSE"

Experimental auction markets are characterized by a strong winner's curse in early auction periods as high bidders consistently lose money, failing to account for the adverse selection problem inherent in winning the auction. With experience and bankruptcy on the part of the worst offenders, subjects earn positive average profits, but these are far below Nash equilibrium predictions as a sizable minority of bids exceed the expected value of the item conditional on having the highest estimate of value. Individual bidding behavior is explored to identify the mechanism whereby market outcomes no longer display the worst effects of the winner's curse.     

It is not just escalation: The one dollar game revisited

This paper examines the one-dollar auction game ruling out escalation. The aim of the paper is to understand if players’ expectations about competitors’ moves are strong enough to induce at least one player to bid more than the auctioned euro. Any other bid represents an expected loss for the bidder, so he maximises his own payoff by choosing a bid, which produces a null expected payoff. The empirical results and the analysis based on them support theoretical findings. It is possible that the winner pays more than €1 to get €1 because of his expectations about competitors’ bids and because of his indifference over a certain interval. The results are symptoms of some risk aversion. In an English auction escalation leads to this result, but when escalation is ruled out, expectations and indifference of preferences can lead to the same result.