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Multi‐round procurement auctions with secret reserve prices: theory and evidence
Author(s) -
Ji Lu,
Li Tong
Publication year - 2008
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.1031
Subject(s) - bidding , common value auction , procurement , microeconomics , counterfactual thinking , payment , economics , reverse auction , auction theory , reservation price , structural estimation , dutch auction , econometrics , revenue equivalence , finance , philosophy , management , epistemology
When a secret reserve price is used in an auction, the auctioneer cannot guarantee that the good can be sold out at the auction, and can reauction the unsold objects in the next round. Motivated by this interesting feature observed in the procurement auctions organized by the Indiana Department of Transportation, we construct a dynamic bidding model in multi‐round procurement auctions with secret reserve prices and evaluate how the release of the auctioneer's reserve price affects bidders' bidding behavior and the auctioneer's expected payment. Our theoretical model predicts that the equilibrium bids uniformly decline over stages, and the numerical analysis of our model indicates that hiding the reserve price may be better than announcing it for the auctioneer under some specifications of underlying distributions. We develop an empirical model with bidders' discount factor equal to zero to recover the unknown structural parameters and to conduct counterfactual analyses. Copyright © 2008 John Wiley & Sons, Ltd.