KOUCHE Amal
Home assignment

1 Auctions vs.“beauty contests”
What is meant with “beauty contests”?
In this case, « beauty contests » refer to specific auction mechanisms in which the auctioneer does not reveal information about the decision making process of the winning bidder.
In « beauty contests », the bidding companies do not have access to the government’s preferences and intentions. This uncertainty context encourages companies to collude between them.

Show that profit maximizing q*,p* are independent of a onceand-for-all lump sum payments:

2) How (not) to run auctions
In the year 2000, there were auctions of spectrum rights for third generation mobile telephones in several European countries. These auctions generated very different amounts of revenue in different countries. How can this be explained?
In the European 3G telecom auctions, different countries earned different revenues.
These inequalities are mainly due to the auctions designs.
The most important considerations in auction design are the ability to attract entries and the prevention of collusion. If we want to design a good auction we have to take into consideration the level of information the bidders have access to and also the knowledge they have been able to gain from previous auctions.
The setting of an adapted reserve price is also crucial, it should not be similar to the one of Switzerland or Germany.
Also, it is important to keep in mind that there is not one « winning » auction design. It varies a lot from one government to another. Everything depends on the ability of the government to develop auctions adapted to the country’s environment in order to get a lot of revenues.

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KOUCHE Amal
Home assignment

Choosing an ascending auction is often a mistake, why?
By using ascending auctions, a bidder can signal to the other bidders how he wants to « collusively » share the spoils with them. Also, he could use the later round to punish other bidders who are not willing to cooperate.
Ascending auctions are also considered as « poor » due to the fact that they allow bidders to deter the entry of rivals. Indeed, a « week » bidder knows that he can be beaten by a stronger bidder who would rebid every time.

What is an English-Dutch auction?
It is a type of auction gathering the best features of both the English and the Dutch auctions. It starts with an ascending auction until two bidders are remaining. Then, they are asked to make a « best and final » bid offer higher than the current asking price. The bidder who is willing to pay the most wins and has to pay the bid.

What are the lessons concerning the reservation price and the entry? We know that an auction with not enough bidders would be unprofitable and inefficient. We have previously evoked the fact that using ascending auctions could be a mistake because they allow bidders to deter other entries.
Moreover, inadequate reserve prices could provoke entry problems. Indeed, sometimes we observe a lack of competition in auctions that could be due to a not adapted reserve price. Therefore, setting a serious reserve price is very important.
Also, the European 3G telecom auctions revealed that the entry problems of later auctions have been strongly impacted by allowing joint bidding arrangements before the auction; and also by not succeeding in using the information from the UK and German auctions to determine adapted reserve prices.

What are the lessons concerning the role of the government?
We observe that auctions have become very popular among government for various administrative procedures.

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KOUCHE Amal
Home assignment

Governments are not only concerned about efficiency but also about revenues because of the « substantial deadweight losses of raising government funds through alternative methods ».
In the European 3G telecom auctions, the different governments had different strategies generating very different amount of revenues among them.

Is there an auction mechanism that is always the most preferred?
The European 3G telecom auctions clearly revealed that the auction design should be carefully adapted to the context. The ascending auctions that were very effective for the UK did not work at all in the Netherlands, Italy and Switzerland, due to entry problems. However, if the UK had used an Anglo-Dutch auction, it would have worked better in the other countries.
Also, the entry problems of later auctions have been strongly impacted by allowing joint bidding arrangements before the auction; and also by not succeeding in using the information from the UK and German auctions to determine adapted reserve prices. And finally the German and Austrian auctions revealed that using ascending auctions could be innefective due to collusive behaviour.
To conclude, auction design is crucial and the most important is to make sure that the auctions are robust against collusion and could attract bidders.

Sources : http://www.nuff.ox.ac.uk/users/klemperer/hownot.pdf ftp://cramton.umd.edu/econ415/klemperer-what-really-matters-in-auctiondesign.pdf http://www.economicsnetwork.ac.uk/archive/lse_writing/page_11.htm 3