Speculation and demand reduction in English clock auctions with resale

Abstract

Many auctions are followed by a resale market which occurs when the winner of the auction resells the item won to one of the participants from the original auction. The existence of such transactions may initially appear counter intuitive. However, this paper will show that active inter-bidder resale results from payo¤ maximizing decisions in the auction that take into account the incentives of a resale opportunity. Speci…cally, I examine how the existence of an inter-bidder resale opportunity impacts bidder behavior in an English clock auction, and to what extent altering the bargaining power of the …nal buyer and reseller in the resale market determines the strategies followed in the initial auction, in an attempt to understand the existence of these inter-bidder transactions. Theoretical and behavioral analysis is used to develop hypotheses of speculation (bidding above value) and demand reduction (bidding below value) which are directly tested in a controlled experimental setting. While value bidding is a dominant strategy in a standard English clock auction without resale, when resale is allowed, this theoretical claim is weaker. Demand reduction is observed when the bargaining power is shifted to the …nal buyer in resale and when the bargaining power is shifted toward the reseller, speculation is observed. The revenue achieved in the initial auction depends on the behavior observed in the auction. Regardless of bargaining power, revenue is shown to decrease below what would have been earned in an English auction without resale due to demand reduction. When the reseller has the bargaining power, and speculation is observed, this loss in revenue is somewhat mitigated by increased speculation. JEL Codes: D44 C90

Demand Reduction in Multi‐Object Auctions with Resale: An Experimental Analysis

“…The recent empirical literature on single‐object auctions with resale shows that subjects integrate the strategic effects of a resale market in their bidding behaviour (Haile, ; Georganas, ; Lange et al ., ; Saral, ). Much less is known, however, about bidder's actual behaviour in more complex auction environments with multiple objects on sale and resale.…”

“…The first experiments by Georganas (), Lange et al . () and Saral () focus on the effects of resale on bidding behaviour in single‐object auctions, while Georganas and Kagel () and Jog and Kosmopoulou () consider asymmetric bidders in single‐object auctions. For multi‐object auctions, Filiz‐Ozbay et al .…”

Entry by successful speculators in auctions with resale

“…Moreover, in the last 5 periods, speculators earned more than the outside option on average, except when both speculators entered, which suggests that learning plays an important role in this environment. 20 Average bidders'earnings were highest with a single speculator and lowest when two speculators entered the auction. Similar to speculators, all treatments have high earnings variability and higher average earnings in the last 5 periods.…”

“…Subjects were 1 3 Previous experiments on auctions with resale assume a di¤erent structure for the resale market. Georganas (2011) use a secondary auction for the resale market; Georganas and Kagel (2011) and Filiz-Ozbay et al (2012) utilize take-it-or-leave-it o¤ers by the auction winner; Lange et al (2011) and Saral (2012) assume automatic transfers to bidders with higher valuations. 1 4 With two speculators, the bidder could make di¤erent o¤ers in each resale market and could exit one market but remain active in the other.…”

Speculation in Procurement Auctions

“…Pagnozzi (2010) studies speculation in complete information multi-object auctions with resale and whether the presence of speculators helps raise the auctioneer's revenue. Saral (2012), Pagnozzi and Saral (2019), and Garratt and Georganas (2021) experimentally study the effects of speculation driven by post-auction resale. Also related to this paper is the bidder collusion literature, which focuses on bidders' endeavors to reduce prospective competition in the auction.…”