Academic journal article Economic Inquiry

Auctions with Resale Opportunities: An Experimental Study

Academic journal article Economic Inquiry

Auctions with Resale Opportunities: An Experimental Study

Article excerpt

I. INTRODUCTION

Standard results in auction theory presume mostly the absence of resale options. However, the sale prices of government-owned assets or public resources are often determined by resale opportunities. Examples include spectrum license auctions and the ensuing sale of telecommunication companies in the last decade, real estate sales, and more recently the sales of rights to emit pollutants, especially greenhouse gases in established emission trading schemes (ETSs or cap and trade schemes). The applicability of a market framework with resale as a foreseeable option extends to (re)allocation of common pool or common property resources which include fisheries, wildlife preserves, and surface water resources (White 2006).

When bidders are offered an option to resell in a secondary market they adjust their bids in the primary auction market. Adding a resale opportunity introduces a common value element to an otherwise private value auction (Haile 1999). If the winner of an auction has all the bargaining power in the resale market (in what we call a seller-advantaged resale regime), there will be a speculative interest in acquiring the item at the auction stage knowing there is a chance to resell it (Hafalir and Krishna 2008). On the other hand, if the loser of the auction has all the bargaining power in the resale market (in a buyer-advantaged resale regime), such an interest is limited and the common value at the auction stage is restricted. Thus we would expect more aggressive bidding and higher resale prices in a seller-advantaged resale regime. In both cases, the common value created by the resale opportunity would lead to a symmetrization of bids; in equilibrium, bidders should behave as if they compete in a symmetric auction for a common value whose size is determined by the structure of the resale market.

In this work, we explore the impact of the resale market structure on bids, linking them to efficiency and auction revenue. We use controlled experiments that mimic the theory to study first price auctions with asymmetric bidders that have resale opportunities. We find higher bids on average in a seller-advantaged resale regime than in a buyer-advantaged resale regime. Interim efficiency, measured in terms of the proportion of efficient outcomes realized at the conclusion of the auction stage, is the same across regimes but higher in magnitude than predicted. Final efficiency is high irrespective of the structure of the secondary market. In the seller-advantaged resale regime, we find statistically significant differences in the bid distributions, consistent with other experimental work (see Georganas 2011). In the buyer-advantaged resale regime, we provide some evidence in support of bid symmetrization; in highly asymmetric environments, however, conforming to the equilibrium strategy may generate undesirable risks for those with values in the upper quartiles of the support.

Our motivation stems from our interest in studying and predicting the effectiveness of ETSs. ETSs are seen as a successful marketbased approach to handle the issue of pollutants and their ill-effects including climate change. The structure of the secondary market for permits can have a significant effect on bidding behavior, initial and final allocative efficiency in ETSs. A sizable portion of the emission allowance futures and option contract trades are carried out via the over the counter (OTC) exchange through bilateral negotiations. (1) Under these circumstances, one can expect firms on either side to exploit bargaining power. The secondary market for Regional Greenhouse Gas Initiative (RGGI) allowances, for example, was a buyer's market (indicated by low prices and volume of trading) until very recently, when prices started to rise and brought about a reversal in the trend. In the near future, more stringent caps may generate higher demand in the secondary market, thereby shifting the bargaining power more from buyers to sellers. …

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