Solution Properties of Deterministic Auctions

James L. Barr and Timothy L. Shaftel

Journal of Financial and Quantitative Analysis, 1976, vol. 11, issue 2, 287-311

Abstract: A market can be imperfectly competitive for a variety of reasons; in the context of an auction or a contract awarding, imperfections may stem from the limited number of bidders involved. Bidders, recognizing that their behavior (or that of others) can affect the market outcome, may adopt strategies that are unlikely to lead to a Pareto efficient allocation. Such inefficiencies can occur in the absence of any collusive behavior on the part of bidders. If barriers to bid entry are removed, and bidders are sufficiently homogeneous, the likelihood increases that bids will reflect full (private) valuations of the auctioned goods. Under these conditions Pareto efficient allocations would be guided by a set of minimum prices: a “sale to the highest bidder” would be transacted at a price approximate to the valuation of the second highest bidder, and contracts would be awarded at the competitive supply price. Even when the number of bidders is restricted, auction procedures can be adopted which will insure efficiency to a degree. This efficiency is achieved by changing the motivations of the available bidders, and by providing incentives for bidders to reveal their full valuations of the objects being auctioned. This paper describes a set of auction procedures which achieve these ends.

Date: 1976
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