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LBL-24277
Preprint
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Lawrence
Berkeley
Lab9ratory
UNIVERSITY
OF
CALIFORNIA
APPLI
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SCI
ENCE
DIVISION
Submitted
to
Management
Science
Why are Vickrey Auctions Rare?
M.H. Rothkopf, T.J. Teisberg,
and
E.P.
Kahn
December 1987
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Prepared
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the U.S. Department of Energy under Contract DE-AC03-76SF00098
DISCLAIMER
This document was prepared
as
an account
of
work sponsored by the United States
Government. While this document is believed to contain correct information, neither the
United States Government nor any agency thereof, nor the Regents
of
the University
of
California, nor any
of
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assumes any legal responsibility for the accuracy, completeness, or usefulness
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favoring by the
United States Government or any agency thereof, or the Regents
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reflect those
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University
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California.
LBL-24277
Why
are Vickrey Auctions
Rare?
by
Michael
H.
Rothkopf,
Thomas
J.
Teisberg,
and
Edward
P.
Kahn
December
16,
1987
Energy
Anlysis
Program
Lawrence
Berkeley Laboratory
University of California
Berkeley, California
94720
"
Why are Vickrey Auctions Rare?
by
LBL-24277
Michael
H.
Rothkopf,* Thomas J. Teisberg,** and Edward
P.
Kahn*
December 16, 1987
Abstract
In
1961, Vickrey showed that,
in
an
independent private values
context with symmetric risk neutral bidders, sealed second-price
auctions have dominant truth
revealing equilibrium strategies, that
with such strategies they are
perfectly efficient economically and
that they produce the same expected revenue for bid takers
as
would
equilibrium strategies
in
oral progressive auctions, Dutch auctions
or standard, first-price
sealed bidding. Yet sealed second-price
auctions
seldom occur.
We
consider seven possible explanations for
their rarity: the effects of bidder risk aversion, bidder asymmetry,
inertia, the effect of the
possibility of multiple offers from a single
bidder, the possibility of bid taker cheating, the presence of
affiliated or common values, and the behavioral disinclination and
nonauction disincentives for bidders
to
follow truth revealing
strategies.
We
argue that the possibility of bid taker cheating and
the disincentives for bidders
to
follow truth revealing strategies
are important explanations.
We
present a simple model of auctions
in
which third parties
capture a fraction of the economic rent
revealed by the second-price
procedure.
In
it, equilibrium strategies are modified
so
that
on
the
average
all of the cost of the captured economic rent is passed
on
to
the bid taker. Furthermore,
we
point out that the logic that led
to
Myerson's revenue equivalence theorem applied
to
this model
requires that with risk
neutral bidders the average cost of revealed
economic rent captured by third parties always be passed
on
to
the
bid taker at equilibrium
in
any symmetric independent private values
model.
*Energy Analysis Program, 90-3125, University of California Lawrence Berkeley Laboratory,
Berkeley, CA 94720
**Teisberg Associates,
50
Horgan, Suite
4,
Redwood City,
CA
94061