IDEAS home Printed from https://ideas.repec.org/a/inm/ordeca/v7y2010i1p40-57.html
   My bibliography  Save this article

Pricing Rule in a Clock Auction

Author

Listed:
  • Peter Cramton

    (Department of Economics, University of Maryland, College Park, Maryland 20742)

  • Pacharasut Sujarittanonta

    (Department of Economics, University of Maryland, College Park, Maryland 20742)

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, whereas provisional losers do not. Such differential shading leads to inefficiency. 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 a bidder to the possibility of losing the auction at a price below the bidder's value. Thus, a fear of losing at profitable prices 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.

Suggested Citation

  • Peter Cramton & Pacharasut Sujarittanonta, 2010. "Pricing Rule in a Clock Auction," Decision Analysis, INFORMS, vol. 7(1), pages 40-57, March.
    • Handle: RePEc:inm:ordeca:v:7:y:2010:i:1:p:40-57
    DOI: 10.1287/deca.1090.0161
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/deca.1090.0161
    Download Restriction: no
    File URL: https://libkey.io/10.1287/deca.1090.0161?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Richard Engelbrecht-Wiggans & Elena Katok, 2009. "A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions," Decision Analysis, INFORMS, vol. 6(2), pages 75-86, June.
    2. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    3. Richard Engelbrecht-Wiggans & Elena Katok, 2008. "Regret and Feedback Information in First-Price Sealed-Bid Auctions," Management Science, INFORMS, vol. 54(4), pages 808-819, April.
    4. Chwe, Michael Suk-Young, 1989. "The discrete bid first auction," Economics Letters, Elsevier, vol. 31(4), pages 303-306, December.
    5. Richard Engelbrecht-Wiggans, 1989. "The Effect of Regret on Optimal Bidding in Auctions," Management Science, INFORMS, vol. 35(6), pages 685-692, June.
    6. Lawrence M. Ausubel & Peter Cramton, 2004. "Auctioning Many Divisible Goods," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 480-493, 04/05.
    7. Rothkopf, Michael H. & Harstad, Ronald M., 1994. "On the role of discrete bid levels in oral auctions," European Journal of Operational Research, Elsevier, vol. 74(3), pages 572-581, May.
    8. Lange, Andreas & Ratan, Anmol, 2010. "Multi-dimensional reference-dependent preferences in sealed-bid auctions - How (most) laboratory experiments differ from the field," Games and Economic Behavior, Elsevier, vol. 68(2), pages 634-645, March.
    9. Richard Engelbrecht-Wiggans & Elena Katok, 2007. "Regret in auctions: theory and evidence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 81-101, October.
    10. Emel Filiz-Ozbay & Erkut Y. Ozbay, 2007. "Auctions with Anticipated Regret: Theory and Experiment," American Economic Review, American Economic Association, vol. 97(4), pages 1407-1418, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Discrete clock auctions: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 15(2), pages 309-322, June.
    2. Vieira, Wilson da Cruz, 2015. "Auctioning off Prizes for Agricultural Product Flow under a Policy of Minimum Prices," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 69(4), December.
    3. Yiakoumi, Despina & Rouaix, Agathe & Phimister, Euan, 2022. "Evaluating capacity auction design for electricity: An experimental analysis," Energy Economics, Elsevier, vol. 115(C).
    4. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Fear of losing in a clock auction," Review of Economic Design, Springer;Society for Economic Design, vol. 16(2), pages 119-134, September.
    5. Robert F. Bordley & Elena Katok & L. Robin Keller, 2010. "Honoring Michael H. Rothkopf's Legacy of Rigor and Relevance in Auction Theory: From the Editors," Decision Analysis, INFORMS, vol. 7(1), pages 1-4, March.
    6. Ehrhart, Karl-Martin & Ott, Marion & Abele, Susanne, 2015. "Auction fever: Rising revenue in second-price auction formats," Games and Economic Behavior, Elsevier, vol. 92(C), pages 206-227.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Theodore L. Turocy & Elizabeth Watson, 2012. "Reservation Values and Regret in Laboratory First‐Price Auctions: Context and Bidding Behavior," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1163-1180, April.
    2. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Fear of losing in a clock auction," Review of Economic Design, Springer;Society for Economic Design, vol. 16(2), pages 119-134, September.
    3. Xiaohu Qian & Shu-Cherng Fang & Min Huang & Qi An & Xingwei Wang, 2018. "Reverse auctions with regret-anticipated bidders," Annals of Operations Research, Springer, vol. 268(1), pages 293-313, September.
    4. Ninoslav Malekovic & Lazaros Goutas & Juliana Sutanto & Dennis Galletta, 2020. "Regret under different auction designs: the case of English and Dutch auctions," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(1), pages 151-161, March.
    5. Shakun D. Mago & Anya C. Savikhin & Roman M. Sheremeta, 2012. "Facing Your Opponents: Social identification and information feedback in contests," Working Papers 12-15, Chapman University, Economic Science Institute.
    6. Vitali Gretschko & Alexander Rajko, 2015. "Excess information acquisition in auctions," Experimental Economics, Springer;Economic Science Association, vol. 18(3), pages 335-355, September.
    7. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Discrete clock auctions: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 15(2), pages 309-322, June.
    8. Alcalde, José & Dahm, Matthias, 2019. "Dual sourcing with price discovery," Games and Economic Behavior, Elsevier, vol. 115(C), pages 225-246.
    9. Wang, Chao & Guo, Peijun, 2017. "Behavioral models for first-price sealed-bid auctions with the one-shot decision theory," European Journal of Operational Research, Elsevier, vol. 261(3), pages 994-1000.
    10. Zhixi Wan & Damian R. Beil & Elena Katok, 2012. "When Does It Pay to Delay Supplier Qualification? Theory and Experiments," Management Science, INFORMS, vol. 58(11), pages 2057-2075, November.
    11. Sascha Füllbrunn & Dirk‐Jan Janssen & Utz Weitzel, 2019. "Risk Aversion And Overbidding In First Price Sealed Bid Auctions: New Experimental Evidence," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 631-647, January.
    12. Richard Engelbrecht-Wiggans & Elena Katok, 2009. "A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions," Decision Analysis, INFORMS, vol. 6(2), pages 75-86, June.
    13. Theodore L. Turocy & Timothy N. Cason, 2015. "Bidding in first-price and second-price interdependent-values auctions: A laboratory experiment," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 15-23, School of Economics, University of East Anglia, Norwich, UK..
    14. Breitmoser, Yves, 2019. "Knowing me, imagining you: Projection and overbidding in auctions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 423-447.
    15. Fugger, Nicolas & Gillen, Philippe & Riehm, Tobias, 2019. "Procurement design with loss averse bidders," ZEW Discussion Papers 19-060, ZEW - Leibniz Centre for European Economic Research.
    16. Mark Isaac & Svetlana Pevnitskaya & Kurt S. Schnier, 2012. "Individual Behavior And Bidding Heterogeneity In Sealed Bid Auctions Where The Number Of Bidders Is Unknown," Economic Inquiry, Western Economic Association International, vol. 50(2), pages 516-533, April.
    17. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
    18. Jason Shachat & Lijia Tan, 2015. "An Experimental Investigation of Auctions and Bargaining in Procurement," Management Science, INFORMS, vol. 61(5), pages 1036-1051, May.
    19. Jason Shachat & Lijia Wei, 2012. "Procuring Commodities: First-Price Sealed-Bid or English Auctions?," Marketing Science, INFORMS, vol. 31(2), pages 317-333, March.
    20. Dirk Bergemann & Karl Schlag, 2012. "Robust Monopoly Pricing," World Scientific Book Chapters, in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 13, pages 417-441, World Scientific Publishing Co. Pte. Ltd..

    More about this item

    Keywords

    auctions; clock auctions; spectrum auctions; behavioral economics; market design;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ordeca:v:7:y:2010:i:1:p:40-57. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.