Auction theory and policy

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Auction theory and policy

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Title: Auction theory and policy


1
Auction theory and policy
  • Why auction theory matters for governments
  • Europe and the 3G auctionsThe UK and the
    Netherlands
  • Auctions and the Victorian Government

2
1 Why auction theory matters for government
  • Governments
  • Buy goods (and services)
  • Sell goods
  • Auctions overcome information problems (adverse
    selection)
  • Auctions are transparent

3
1 Why auction theory matters for government
  • Auction design impacts on behaviour, which in
    turn impacts on the outcome of the auction
  • Auctions can be tailored to reflect
  • The governments objectives
  • The good/service being auctioned
  • Single units or bundles of units? Do
    complementarities exist between units?
  • The nature of the market
  • Competitive industry? (Market power a problem?)
  • Collusion likely to be a problem?

4
2 Europe and the 3G auctions
  • What is a 3G license?
  • The policy issue
  • In 2000 six Governments across Europe auctioned
    off 3G licenses.
  • 3G new technology governments had no capacity to
    estimate the value of licenses.
  • 3G licenses had a common value component
  • Each country designed its own auction.
  • Each market had different market conditions
    (number and size of incumbents and potential
    market entrants).
  • Countries made different numbers/bundles of
    licenses available for purchase.

5
2.1 The UK auctions
  • The UK market conditions
  • 4 incumbent companies with market advantages
  • Several potential market entrants
  • Government goals
  • Assign licenses efficiently
  • Encourage competition
  • To realise the full economic value of licenses
  • Limit of one license per bidder (to maintain a
    competitive industry)
  • The Government hired auction theorists to design
    the auction and tested the design in experimental
    labs.

6
2.1 The UK auctions cont
  • The original plan was to sell 4 licenses.
  • Because there were 4 incumbents there was concern
    that an ascending auction (English Auction)
  • Would discourage new entrants, as dominant
    companies can always out-bid weaker firms
  • May lead to collusion
  • On the other hand there was concern that a
    sealed-bid auction may lead to an inefficient
    outcome, as dominant firms may under-bid in an
    attempt to capture large surpluses, and therefore
    be outbid by weaker firms

7
2.1 The UK auctions cont
  • The Government therefore planned to run an
    Anglo-Dutch auction an ascending auction would
    run until 5 contestants remained, at which point
    these companies would submit sealed bids at or
    exceeding the final price.
  • This format performed well in experimental
    testing.

8
2.1 The UK auctions cont
  • At this point, a fifth license became available
    for sale.
  • As a result the government elected to use a
    simple ascending (English) auction - the
    restriction of one license per company and the
    availability of a fifth license made it possible
    for a new market entrant to purchase a license.
  • 9 new market entrants participated ( 4
    incumbents)
  • The UK 3G auction raised 39billion
  • This auction format gave the government a good
    understanding of the value the market placed on
    3G licenses.

9
2.1 The UK auctions cont
  • What can be learned from the UK 3G auction?
  • There is no such thing as a good auction, just
    a good auction for the particular task.
  • UK Government hired auction theorists and tested
    their auction design in the lab to make sure that
    their design was robust and achieved their goals.

10
2.2 The Netherlands auctions
  • The Dutch market conditions
  • 5 incumbent companies with market advantages
    (versus 4 in the UK)
  • 5 licenses for purchase (as per the UK)
  • The Dutch Government used the same design as the
    UK Government an ascending auction.

11
2.2 The Netherlands auctions cont...
  • Recognising that the 5 incumbent companies would
    be able to out-bid them, smaller companies chose
    to make deals with the incumbents rather than
    losing at auction.
  • Only 1 non-incumbent participated ( 5
    incumbents)
  • The Netherlands auction raised 3 billion (versus
    39 billion in the UK).
  • The auction did not reveal to the Dutch
    Government the value the market placed on 3G
    licenses.

12
2.2 The Netherlands auctions cont...
  • What can be learned from the Netherlands 3G
    auction?
  • The auction format that works in one set of
    circumstances is extremely unlikely to work
    successfully in other circumstances subtle
    variations in the market conditions can give rise
    to big differences between outcomes. Treating
    auction designs like blueprints is extremely
    risky for governments.
  • Auctions needs to be tailor-made auction theory
    and experimental testing will substantially
    improve auction outcomes.

13
3 Auctions and the Victorian Government
  • BushTender
  • The Government wanted to improve native
    vegetation on private land therefore needed to
    procure improvements in native vegetation.
  • The Government wanted to engage private
    landholders in contracts to improve their native
    vegetation.
  • A specific goal was that contracts should be
    cost-effective.

14
3 Auctions and the Victorian Government
  • Problems
  • It was difficult to measure improvements in
    native vegetation the good the government
    wanted to purchase was poorly defined
  • It was difficult to identify the landholders who
    offered the government good value for money
    (adverse selection)
  • Solution
  • The Government developed a metric that made it
    possible to measure the quality and quantity of
    vegetation improvements that they were purchasing
    (Habitat Hectare)
  • The Government decided to use an auction
    mechanism to allocate contracts for improvements
    in native vegetation.

15
3 Auctions and the Victorian Government
  • Design questions
  • First price or second price? (Discriminating
    price or uniform price auction)?
  • Sealed bid or open auction?
  • Single round or multiple rounds?
  • How encourage participation?

16
3 Auctions and the Victorian Government
  • The piloted BushTender format
  • First-price auction (discriminating price
    auction)
  • Sealed bid
  • Single round
  • Encouraged participation through lengthy
    engagement with potential participants and
    information distribution.

17
3 Auctions and the Victorian Government
18
3 Auctions and the Victorian Government
Rare and good value
Common and poor value
19
Auction theory and policy
  • Summary
  • Auctions are a transparent allocation mechanism
  • The design of an auction impacts on participants
    behaviour (bidding), and in turn the outcome of
    the auction
  • Well-designed auctions can be used to
  • Improve allocative efficiency
  • Increase revenue / reduce expenditure
  • Gather information
  • Auctions must be carefully designed to reflect
    policy objectives and the specific nature of the
    good/s being auctioned and market conditions
  • Auction theory and can be used to improve auction
    design, while testing in experimental labs can be
    used to test the robustness of an auction and to
    minimise the risk of unexpected outcomes
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