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Pricing Rule in a Clock Auction

Peter Cramton () and Pacharasut Sujarittanonta

Papers of Peter Cramton from University of Maryland, Department of Economics - Peter Cramton

Abstract: We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. The size of the inefficiency declines with smaller bid increments. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes bidders to the possibility of losing the auction at a price below the bidder's value. Thus, fear of losing may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser's regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders' fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction.

Keywords: Auctions; clock auctions; spectrum auctions; behavioral economics; market design (search for similar items in EconPapers)
JEL-codes: D44 C78 L96 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2009, Revised 2009
New Economics Papers: this item is included in nep-cwa, nep-exp, nep-ind and nep-mic
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Published in Decision Analysis, 7, 40-57, 2010

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