Strategic Demand
Reduction in homogenous
multiunit auctions
(where bidders may be interested in more than one unit)
How does the homogenous multiunit auction mechanisms work?
 Three
common auction
mechanisms:
 Pay-as-you
bid auction
 Uniform price auction
 Simultaneous ascending-bid auction
‘Pay-as-you-bid’ auction
Bidders each submit bids for various
quantities at various prices,
 the auctioneer determines the marketclearing price,
 all bids exceeding the market-clearing
price are accepted, and bidders


pay their winning bids.
Uniform price auction
 Bidders
each submit bids for various quantities at
various prices,
 the auctioneer determines the market-clearing price,
all bids exceeding the market-clearing price are
accepted
 bidders pay the market-clearing price for all units
won, rather than their actual bids.

Like in second price sealed bid auction

Though efficiency cannot compared to single unit second
price sealed bid auction
Activity :
English Auction of Jar containing
‘Coins’

Rules/Things you should know about:
 This
is a ‘common value’ ascending auction
 No collusive bidding is allowed
 Do not Jump-Bid, this undermines the entire thing
 Everybody is supposed to observe the bidding process
carefully and learn about others valuations from it.
 You should try to make a profit, if possible

The main objective is iterative price discovery of an items of
unknown value (Common Value)
Is the English auction of an item
equivalent to second-price sealed
bid auction? Why?
 Depends
on the item being
auctioned
It
is not different in a private value
case, Why?
 Your
valuations aren’t influenced by the
valuations of others just like in a second
price sealed bid auction
Advantages of English Auction
in a common value setting
Multiple
rounds enable price
discovery
Helps Reduce ‘winners curse’
Enables you to change your
valuations/discover prices on the fly
Brain Teaser / Discussion

How about related items
(substitutes/compliments) being auctioned
of concurrently using an English auction?

What is the optimal bidding strategy?
 What advantage does the bidder have?
Simultaneous Ascending bid
auctions

Basic features:
 allocates
a set of M related goods among N
agents via separate, concurrent English
auctions for each good (M<=N)
 Each auction may undergo multiple rounds of
bidding
The most essential difference
between multi and single unit
auctions

Diminishing marginal utility of each extra
item should be taken into account
 Definition
(watered down): There is a decline in the
marginal utility that person derives from consuming each additional unit
of that product.
 This is the premise on which buffet-style restaurants operate. They
entice you with "all you can eat," all the while knowing each
additional plate of food provides less utility than the one before. And
despite their enticement, most people will eat only until the utility
they derive from additional food is slightly lower than the original

Hence the marginal value of the second item in the
auction may be lower than first one which implies that a
bidder may not pay as much for the second as the first.
Demand and Supply of an arbitrary
commodity

Price
(P)
An Illustration
PE is the
equilibrium price
Demand
PE
Supply
QE is the
equilibrium qty
Reduction in demand
- Price drops
- Qty drops
QE
Quantity (Q)
Demand and Supply curves in a
homogenous multiunit auction

Price
(P)
An Illustration
PE is the
equilibrium price
Demand
PE
Supply
QE is the
equilibrium qty
Reduction in demand
- Price drops
- Qty remains the same
QE > 1
Quantity (Q)
Strategic Demand Reduction

“We have some control over the prices because
we are the market”

Sometimes an agreement with other bidders are reached
during the bidding process. ("If you give me what I want, I’ll
leave you alone in the next round”)


Similar happened in 1994 FCC broadband spectrum auctions:
 In round 11, PageNet decided to cut
back from bidding on 3 large licenses to 2 . Why?
In uniform price auctions this will help one save on
inframarginal (the number of items that you absolutely need)
items.
How can one exploit this to
bidders advantage?
A couple of questions?

Does RET hold in a multiunit auction where bidders are
interested in more than one item? Why so?


Answer in Appendix A of the paper due today
Which one would dominate in terms of expected
revenues?

Depends



The goods being auctioned (whether they are substitutes or
complements or totally unrelated)
The number of bidders in the market.
Simultaneous Ascending bid auction has had a lot of
success with the FCC spectrum auctions

The main reason being, bidders having access to preferences
of other bidders during the bidding process
Conclusion

Must take other bidders demands into
consideration
 Failure
to do so will drive up the prices to
unfavorable levels for all participating parties
 This is one way everybody is better of!
References:






Klemperer, P. 1999. Auction theory: A guide to the
literature. Journal of Economic Surveys.
Weber, R. J. 1997. Making more from less: Strategic
demand reduction in the FCC spectrum auctions.
Journal of Economics and Management Strategy
6(3):529–548.
Stone, P. 2002. Randomized Strategic Demand
Reduction ACM transactions
Crampton, 1995. Journal of Economics and
Management Strategy
Crampton, 2005.
Many more…