Academic journal article Economic Inquiry

Experimental Comparisons of Auctions under Single- and Multi-Unit Demand

Academic journal article Economic Inquiry

Experimental Comparisons of Auctions under Single- and Multi-Unit Demand

Article excerpt

I. INTRODUCTION

The study of multiple-unit auctions is important because of their widespread use and the high value of goods sold. Examples include auctions of U.S. treasury debt, cut flowers, wine, foreign exchange, and other financial and monetary instruments. Moreover, since auctions are often proposed by economists as a method of sale for other goods, as in McMillan [1994], the use of auctions can be expected to increase in the future. Many different auction rules are used to sell these diverse commodities and auction rule changes are often suggested, usually with the intention of increasing revenue or improving the allocations, and thus there is a considerable and increasing number of known auction formats.

Evaluating new or comparing different auction mechanisms using field tests can be very costly and risky. However, experimental methods can and have been used by economists to study the behavioral characteristics of different auction procedures; Kagel [1995] provides a recent comprehensive survey. Most experimental studies consider the behavior of auctions when there is a single unit to be sold. A few studies, such as Cox et al. [1984; 1985] and McCabe et al. [1990; 1991] study multiple-unit auctions in environments in which each bidder demands at most one object from a set of identical objects being sold. The studies of Smith [1967], Belovicz [1979], Miller and Plott [1985] and Burns [1985] consider multi-unit demand environments. These are environments in which bidders have demand for multiple (identical) units and are permitted to purchase multiple units of the commodity sold. The extension to multi-unit demand is important since the presence of multi-unit demand is a characteristic of many auctions in the field, including all of the examples above.

In this study we consider the behavior of two types of multi-unit auction under both single-unit and multi-unit demand. We construct a laboratory environment which we use to study an English clock (EC), which is a special type of English auction, and a sealed-bid auction with lowest-accepted-bid pricing (SB). In the SB each bidder pays a per-unit price equal to the lowest accepted bid. The EC was chosen because it is known to provide highly efficient allocations in auctions of single-unit goods and therefore is likely to be suggested for many field applications. The SB was chosen because of its widespread use which makes its outcomes a useful basis of comparison for the outcomes of the English clock auction.(1) However, we do not attempt to represent a particular field situation here. Instead, since our interest is in understanding the basic properties of the auctions, we chose an experimental design that enables us to make simple comparisons across treatments and with previous (and possibly future) studies. The design enables us to perform simple testing of game-theoretic models in some of the treatments.

In our view the difference between single- and multi-unit demand is critical. As we discuss in section II, many of the results of auction theory that are valid in single-unit demand environments no longer apply in multi-unit demand environments, suggesting that the observed behavior of auctions might also differ between the two environments. Therefore, we isolate the effects of multi-unit demand by conducting single-unit demand experiments under identical market demand and supply conditions as the multi-unit demand experiments. These and other aspects of the experimental design are described in detail in section III. The results and a discussion are given in sections IV and V respectively.

II. INSTITUTIONS, THEORY AND PREVIOUS STUDIES

The English Clock Auction

This variant of the English auction was modeled by Milgrom and Weber [1982] and studied by McCabe et al. [1990; 1991]. In our version, the auction begins with all bidders publicly and simultaneously announcing their initial quantity demanded at price zero. If there is excess demand, the price is increased by a small increment, and the bidders then announce new quantities demanded. …

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