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Auctions, Market Prices and the Risk Attitude Effect

Author

Listed:
  • Maarten C.W. Janssen

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Vladimir A. Karamychev

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

This paper develops one possible argument why auctioning licenses to op-erate in an aftermarket may lead to higher prices in the aftermarket comparedto a more random allocation mechanism. Key ingredients in the argumentare differences in firms' risk attitudes and the fact that future market prof-its are uncertain so that winning an auction is like winning a lottery ticket.li one license is auctioned, auctions select the firm that is least risk averse.This is what we call the risk attitude effect. Firms that are less risk aversetend to set higher prices (or higher quantities in case quantity is the decisionvariable) in the marketplace than an average firm. When multiple licensesare auctioned, this conclusion gets strengthened when there is a differenti-ated Eertrand oligopoly in the marketplace. In case of Cournot competition,a strategic effect works against the risk attitude effect so that under certainconditions the more risk averse firms will be selected leading (again) to highermarket prices.

Suggested Citation

  • Maarten C.W. Janssen & Vladimir A. Karamychev, 2005. "Auctions, Market Prices and the Risk Attitude Effect," Tinbergen Institute Discussion Papers 05-025/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20050025
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    References listed on IDEAS

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    Cited by:

    1. Theo Offerman & Jan Potters, 2006. "Does Auctioning of Entry Licences Induce Collusion? An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 769-791.
    2. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and Its Applications," De Economist, Springer, vol. 154(3), pages 481-481, September.
    3. Janssen, Maarten C.W. & Karamychev, Vladimir A., 2009. "Auctions, aftermarket competition, and risk attitudes," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 274-285, March.
    4. Janssen, Maarten C.W. & Karamychev, Vladimir A., 2007. "Selection effects in auctions for monopoly rights," Journal of Economic Theory, Elsevier, vol. 134(1), pages 576-582, May.

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    More about this item

    Keywords

    Auctions; Risk Attitude; Aftermarkets;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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