Stanford GSB Faculty Explain How Companies Exploit Uncertainty In Auctions

Stanford GSB faculty

Stanford’s Graduate School of Business recently posted an article by Luke Stangel on how companies “leverage a flaw” when it comes to spectrum auctions where “assets of different types are bought or sold simultaneously.”

Stanford GSB dean Jonathan Levin and economics professor Andrzej Skrzypacz published a new paper in which they surveyed “the bidding behavior in spectrum auctions” and found anomalies that “create major strategic uncertainty and open the opportunity of predatory bidding.” Skrzypacz explains, “Designing multi-unit auctions is part science, part politics, part art.”

One curious case is the current deal involving the Federal Communications Commission, in which Internet providers vie for the “tens of billions of wireless spectrum” offered by TV broadcasters in a format dubbed “the simultaneous multiple-round auction.” According to the article, the FCC aims to create a set of radio spectrum licenses by purchasing and re-selling television licenses to Internet providers.

In combinatorial clock auctions, which involve “an initial multi-round stage of bidders publicly declaring their interest in bundled packages of spectrum at different price points, followed by a second round of sealed bids,” Levin and Skrzypacz noticed that “one company would sometimes pay less than competitors, despite winning similar or larger amounts of spectrum.”

According to the article, “the combinatorial clock auction can be manipulated” due to Vickrey pricing, “where the winning bidder pays an equivalent of the second-highest price in a single-unit auction.”

The researchers offer this example to explain Vickrey pricing, which is intended to offer incentives to bid true auction values and “allow spectrum to be allocated efficiently”:

Say Alice bids $100 for item 1 and $80 for item 2, while Bob bids $50 for item 1 and $150 for item 2. Bob would win object 2 and pay $80 (Alice’s bid for that item) and Alice would win item 1 and pay $50 (Bob’s bid for that item).

Multi-round auctions compound the difficulties of Vickrey pricing because bidders can observe their competitors’ behavior and inspire artificial acceleration of demand and subsequently price of a specific spectrum package, regardless of the buyer’s interest in actually winning.

Skrzypacz hopes that the paper will “prompt regulators to think harder about the best format for their specific auction.”

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