Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
according to pre-determined rules. Open auctions can be either ascending or
descending, for example, and sealed-bid auctions can specify that the winner
pays his own bid (‘a first-price auction’) or the bid of his strongest competitor,
for example (‘a second-price auction’). Simultaneous multi-round auctions
(SMRAs) have been used in the allocation of radio spectrum and the divestment
of electricity generating capacity. In an SMRA, a number of items are sold
simultaneously over multiple rounds. The auction closes when no new bids are
forthcoming and each item is sold to the highest bidder. Over the course of the
auction, the prices of different items vary and bidders can switch between them
on the basis of their relative price. 191
Klemperer points to the divergent outcomes of the European spectrum auctions
for 3G mobile licences as evidence of the impact of auction design. 192 In Germany
and the UK, spectrum sold for more than 600 euros per person, whereas in
Austria, Netherlands, Italy and Switzerland the sums raised were 100, 700, 240
and 20 euros per person respectively. Klemperer identifies the main potential
pitfalls as permitting collusion or entry-deterring and predatory behaviour and
outlines the means through which these traps could be avoided.
Auction design is particularly important where the number of competitors is not
large in relation to the number of items being sold. Brusco and Lopsmo (1999)
prove that the possibility for collusive outcomes declines as the number of
bidders rises relative to the number of items being auctioned, as the possibility
of bidders agreeing on how to split the bids falls. 193 However, where the expected
number of competitors is few, collusion can be a real concern. Klemperer notes
that open ascending auctions can be particularly prone to collusion because:
a. bidders can use the early stages of low prices to signal who should win which
object and then tacitly agree to stop pushing up prices; and
b. they offer a punishment mechanism as members can bid more aggressively
for lots they do not want. The firm that wants that particular licence will then
bid higher so the punishment mechanism is costless. Furthermore, by
blocking entry, ascending auctions encourage remaining strong bidders to
collude.
Bidders may also be able to exploit an auction set-up to engage in entrydeterring
or predatory behaviour. If asymmetries between bidders are too great,
there is little incentive for others to enter given the costs associated with
bidding. Weaker bidders are likely to perceive the outcome as a foregone
conclusion, and so not participate. This perception creates an incentive for
bidders to develop an advantage as an effective predatory strategy, and create a
reputation for aggressiveness to reinforce this advantage. Predation is
particularly easy in repeated ascending auctions as it is easier to develop a
stronger reputation.
191 •econ report for the OFT
192 Klemperer, P, 2002, What really matters in auction design, Journal of economic perspectives, 16(1).
193 Brusco, S. and Lopsmo, G. 1999. Collusion via signalling in open ascending auctions with multiple objects and
complementarities. Working paper, Stern School of Business, New York University
176