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Underpricing and market power in uniform price auctions


Kremer, Ilan; Nyborg, Kjell G (2004). Underpricing and market power in uniform price auctions. Review of Financial Studies, 17(3):849-877.

Abstract

In uniform auctions, buyers chosse demand schedules as strategies and the same "market clearing" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantitity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.

In uniform auctions, buyers chosse demand schedules as strategies and the same "market clearing" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantitity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.

Citations

35 citations in Web of Science®
45 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2004
Deposited On:08 Aug 2012 11:15
Last Modified:05 Apr 2016 15:46
Publisher:Oxford University Press
Number of Pages:29
ISSN:0893-9454
Publisher DOI:https://doi.org/10.1093/rfs/hhg051
Other Identification Number:merlin-id:6932
Permanent URL: https://doi.org/10.5167/uzh-61727

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