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Not knowing the competition: evidence and implications for auction design
Author(s) -
Kong Yunmi
Publication year - 2020
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12342
Subject(s) - common value auction , counterfactual thinking , microeconomics , economics , competition (biology) , forward auction , auction theory , revenue equivalence , risk aversion (psychology) , revenue , english auction , unique bid auction , vickrey auction , financial economics , expected utility hypothesis , finance , philosophy , epistemology , ecology , biology
In a government auction program where first‐price auctions generate significantly higher revenue than English auctions, I document evidence that bidders are uncertain about the number of auction entrants. Motivated by additional data evidence, I estimate a structural model of auctions in which rivals' participation is stochastic, allowing for bidders' risk aversion and asymmetry. Counterfactual simulations reveal that bidders' uncertainty about the number of entrants, combined with risk aversion, substantially softens the revenue impact of low competition in first‐price auctions. This explains the observed revenue patterns and uncovers an empirically important reason for sellers to favor first‐price auctions over English auctions.