"Comments on
the RGGI Market Design." Submitted to RGGI, Inc. by ISO New England and
NYISO, 15 November 2007.
"The 700 MHz Spectrum Auction: An Opportunity to Protect Competition In a
Consolidating Industry" (with
Andrzej Skrzypacz and Robert Wilson), submitted to the U.S. Department of
Justice, Antitrust Division, 13 November 2007.
"Forward
Reliability Markets: Less Risk, Less Market Power, More Efficiency" (with
Steven Stoft) Utilities Policy, forthcoming, 2008.
A forward reliability market is presented. The market coordinates new entry
through the forward procurement of reliability options—physical capacity bundled
with a financial option to supply energy above a strike price. The market
assures adequate generating resources and prices capacity from the bids of
competitive new entry in an annual auction. Efficient performance incentives are
maintained from a load-following obligation to supply energy above the strike
price. The capacity payment fully hedges load from high spot prices, and reduces
supplier risk as well. Market power is reduced in the spot market, since
suppliers enter the spot market with a nearly balanced position in times of
scarcity. Market power in the reliability market is addressed by not allowing
existing supply to impact the capacity price. The approach, which has been
adopted in New England and Colombia, is readily adapted to either a thermal or a
hydro system.
"Colombia’s
Forward Energy Market," Working Paper,
University of Maryland, August 2007. [Presentation,
Letter to NordPool]
This paper presents a market design for Colombia’s forward energy market, which
is scheduled to began in 2008. The forward energy market is an organized market
to procure energy for electricity customers on a forward basis. It includes both
the regulated market (residential and other small customers) and the
nonregulated market (large customers). Currently, regulated customers represent
68% of the total electricity demand and nonregulated customers represent the
remaining 32%. The proposed design is novel in that it integrates both the
regulated and nonregulated customers into a single organized market. Although
the regulated and nonregulated energy products remain distinct, their
integration into a single market facilitates arbitrage between the products,
improves liquidity, and reduces transaction costs. Both regulated and
nonregulated customers benefit from this unified approach. This paper presents
all elements of the market design: the product design (see also Cramton 2007),
the auction design, and the transition to the new market.
"Comments on the FCC’s Proposed Competitive Bidding Procedures for Auction 73" (with
Gregory Rosston, Andrzej Skrzypacz, and Robert Wilson), 31 August 2007. [Frontline
Wireless Filing,
Reply Comments]
"An Overview of Combinatorial Auctions" (with Yoav Shoham and Richard
Steinberg), ACM SIGecom Exchanges, 7, 3-14, 2007.
An auction is combinatorial when bidders can place bids on combinations of
items, called “packages,” rather than just individual items. Computer scientists
are interested in combinatorial auctions because they are concerned with the
expressiveness of bidding languages, as well as the algorithmic aspects of the
underlying combinatorial problem. The combinatorial problem has attracted
attention from operations researchers, especially those working in combinatorial
optimization and mathematical programming, who are fascinated by the idea of
applying these tools to auctions. Auctions have been studied extensively by
economists, of course. Thus, the newly emerging field of combinatorial auctions
lies at the intersection of computer science, operations research, and
economics. In this article, we present a brief introduction to combinatorial
auctions, based on our book, Combinatorial Auctions (MIT Press, 2006), in
which we look at combinatorial auctions from all three perspectives.
"The Effect of Incumbent Bidding in Set-Aside Auctions: An Analysis of Prices in
the Closed and Open Segments of FCC Auction 35" (with Allan T. Ingraham and
Hal J. Singer) Telecommunications Policy, 32, 273-290, 2008.
This paper examines the impact of an incumbent carrier’s participation in two
simultaneously conducted auctions: one set-aside for non-incumbents and one open
to all carriers. This paper estimates the extent to which prices in the closed
auction were inflated by the participation of incumbents. This paper also
estimates what prices would have been in the open auction had incumbents been
excluded from bidding in the closed. It is found that an incumbent’s
participation in the closed auction through a front, Alaska Native, enabled it
to win more licenses at lower prices in FCC Auction 35. In contrast,
non-incumbents won fewer licenses and paid more for what they won. The
econometric techniques employed here to estimate prices in a “but for” world
could be replicated in future damage analysis. Finally, this paper suggests an
alternative method of screening bidders seeking access to set-aside auctions
that would be consistent with the FCC’s goal of promoting competition in the
wireless industry.
Economist
Letter to NTIA on 700 MHz Spectrum Auction (with Andrzej Skrzypacz, Simon
Wilkie, and Robert Wilson), 30 July 2007.
As the 700 MHz
auction approaches, we are writing to clear up a common misconception about the
nature of spectrum auctions and the impact of various rules on auction revenues.
"Essential Entry: Revenues in the 700 MHz Spectrum Auction,"
Working Paper, University of Maryland, 13
July 2007.
A common misconception is that an open access provision on a sliver of the 700
MHz spectrum would reduce auction revenues. In fact, the open access, wholesale,
and bidding credit provisions put forth by Frontline Wireless, will motivate new
entry, enhance competition in the auction, and raise revenues.
"Revenues
in the 700 MHz Spectrum Auction" (with
Andrzej Skrzypacz and Robert Wilson), Working Paper, University of Maryland, 27
June 2007.
There have been several comments that criticize auction rules that prevent the
two major low-frequency incumbents from winning all of the newly available
spectrum and incorporating it into their proprietary networks. Such rules
include new-entrant set-asides, new-entrant bidding credits, and the open access
plan. We disagree with these criticisms and argue that given the current market
structure, such rules are likely to improve welfare and auction revenues. We are
submitting this report to provide sound economic analysis of these claims.
"Economic Comments on the Design of the 700 MHz Spectrum Auction" (with
Andrzej Skrzypacz and Robert Wilson), submitted with
testimony of James L. Barksdale to the U.S. Senate Committee on Commerce,
Science, and Transportation, 14 June 2007. [Initial
FCC Filing]
We comment on the service and auction rules discussed in the Report and Order
and Further Notice of Proposed Rule Making, FCC 07-72, 27 April 2007. We
recommend that the FCC designate one license for a wholesale operation that
provides open access nationwide on nondiscriminatory terms. This is necessary to
enable entry of new businesses offering wireless services in retail markets. It
also enables local operators to offer roaming at competitive prices. The new
license accords with the Commission’s policy to encourage competition, and
recognizes the benefits to consumers from low prices and expanded services.
"Auction Design for Colombia’s Forward Energy Market," Working Paper,
University of Maryland, July 2007. [Presentation]
"Product Design for Colombia’s Regulated Market," Working Paper,
University of Maryland, June 2007. [Presentation]
This paper presents a product design for Colombia’s regulated market (MOR),
which is scheduled to began in 2008. The regulated market consists of
residential and other small customers. Currently, regulated customers represent
69% of the total load. I propose a market based on a single load-following
product in which each supplier bids to serve its desired share of the Colombia
regulated load. Thus, a supplier that wins a 10% share at auction has an
obligation to serve 10% of the actual regulated load in every hour of the
commitment period. The supplier is paid the MOR clearing price for every MWh of
energy supplied. Deviations between the supplier’s hourly supply and obligation
are settled at the spot energy price or the scarcity price, whichever is lower.
The spot settlement price is capped at the scarcity price, since the firm energy
market provides price coverage for prices above the scarcity price (about
US$125/MWh). One-hundred percent of regulated load is purchased on behalf of the
regulated customers in a sequence of auctions. Thus, MOR together with the firm
energy market provides 100% price coverage for all regulated customers. MOR
provides price coverage from zero to the scarcity price, and the firm energy
market provides price coverage above the scarcity price. This accomplishes two
things: 1) it provides rate stability for regulated customers, and 2) it
provides revenue stability for suppliers. The result is reduced risk for both
sides of the market.
"Market-Based Alternatives for Managing Congestion at New York’s LaGuardia
Airport," (with Michael O. Ball, Lawrence M. Ausubel, Frank Berardino,
George Donohue, Mark Hansen, and Karla Hoffman), in Optimal Use of Scarce
Airport Capacity, Proceedings of AirNeth Annual Conference, The Hague, April
2007.
We summarize the results of a project that was motivated by the expiration of
the “High Density Rule,” which defined the slot controls employed at New York’s
LaGuardia Airport for more than 30 years. The scope of the project included the
analysis of several administrative measures, congestion pricing options and slot
auctions. The research output includes a congestion pricing procedure and also
the specification of a slot auction mechanism. The research results are based in
part on two strategic simulations. These were multi-day events that included the
participation of airport operators, most notably the Port Authority of New York
and New Jersey, FAA and DOT executives, airline representatives and other
members of the air transportation community. The first simulation placed
participants in a stressful, high congestion future scenario and then allowed
participants to react and problem solve under various administrative measures
and congestion pricing options. The second simulation was a mock slot auction in
which participants bid on LGA arrival and departure slots for fictitious
airlines.
"Colombia Firm Energy Market," (with Steven Stoft), Proceedings of the
Hawaii International Conference on System Sciences, January 2007.
A firm energy market for Colombia is presented. Firm energy—the ability to
provide energy in a dry period—is the product needed for reliability in
Colombia’s hydro-dominated electricity market. The firm energy market
coordinates investment in new resources to assure that sufficient firm energy is
available in dry periods. Load procures in an annual auction enough firm energy
to cover its needs. The firm energy product includes both a financial call
option and the physical capability to supply firm energy. The call option
protects load from high spot prices and improves the performance of the spot
market during scarcity. The market provides strong performance incentives
through the spot energy price. Market power is addressed directly: existing
resources cannot impact the firm energy price. Since load is hedged from high
spot prices, the market can rely on high prices to balance supply and demand
during dry periods, rather than rationing.
"Simulation of the Colombian Firm Energy Market," (with Steven Stoft and
Jeffrey West), Working Paper, University of Maryland, December 2006.
We present a simulation analysis of the proposed Colombian firm energy market.
The main purpose of the simulation is to assess the risk to suppliers of
participation in the market. We also are able to consider variations in the
market design, and assess the impact of alternative auction parameters. Three
simulation models are developed and analyzed. The first model (Model 1) uses
historical price data from October 1995 through May 2006 to assess the
performance risk of hypothetical thermal and hydro generating units. The second
model (Model 2) uses historical price and operating data to assess performance
risk of the actual generating units in Colombia over the same period. This
analysis allows us to assess company risk. The third model (Model 3) differs
from the other models in that it explicitly models the firm energy auction and
investments going forward. Thus, the model is able to assess how the
distribution of firm energy purchases differs from the firm energy target, and
how this distribution depends on the firm energy demand curve. Model 3 also
studies the investment decisions of suppliers, the impact of lumpy investments,
and the impact of a higher scarcity price. Taken together, the simulation
results demonstrate the risk reducing benefits of the firm energy market.
Provided there is competitive new entry in response to load growth, the firm
energy market should work well at coordinating investment in new supply, while
minimizing supplier and consumer risks.
"Spectrum Auction Design," Working Paper, University of Maryland,
April 2007. [Presentation]
Spectrum auctions are used by governments to assign and price licenses for
wireless communication. The standard approach is the simultaneous ascending
auction, in which many related lots are auctioned simultaneously in a sequence
of rounds. I analyze the strengths and weaknesses of the approach. I then
present a variation, the package clock auction, which addresses many of the
problems of the simultaneous ascending auction while building on its strengths.
The package clock auction is a simple dynamic auction in which bidders bid on
packages of lots. Most importantly, the pricing rule and information policy are
carefully tailored to mitigate gaming behavior. Truthful bidding is encouraged,
which simplifies bidding and improves efficiency.
"Why We
Need to Stick with Uniform-Price
Auctions in Electricity Markets," (with
Steven Stoft), Electricity Journal, 20:1, 26-37, 2007.
Wholesale electricity markets are commonly organized around a spot energy
market. Buyers and suppliers submit bids and offers for each hour and the market
is cleared at the price that balances supply and demand. Buyers with bids above
the clearing price pay that price, and suppliers with offers below the clearing
price are paid that same price. This uniform-price auction, which occurs both
daily and throughout the day, is complemented by forward energy markets. In
practice, between 80 and 95 percent of wholesale electricity is traded in
forward energy markets, often a month, or a year, and sometimes many years ahead
of the spot market. However, because forward prices reflect spot prices, in the
long run, the spot market determines the total cost of energy. It also plays a
critical role in the least-cost scheduling and dispatch of resources, and
provides an essential price signal both for short-run performance and long-run
investment incentives. Arguments that the uniform-price auction yields
electricity prices that are systematically too high are incorrect. However,
insufficiently hedged spot prices will result in energy costs that fluctuate
above and below the long-run average more than regulated prices and more than is
socially optimal. Tampering with the spot price would cause inefficiency and
raise long-term costs. The proper way to dampen the impact of spot price
fluctuations is with long-term hedging. Although re-regulation can provide a
hedge, there are less costly approaches.
"The Convergence of Market Designs for Adequate Generating Capacity," (with
Steven Stoft), Working Paper, University of Maryland, April 2006.
This paper compares market designs intended to
solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous
claims, the most advanced designs have nearly converged. The original dichotomy
between approaches based on long-term energy contracts and those based on
short-term capacity markets spawned two design tracks. Long-term contracts led
to call-option obligations which provide market-power control and the ability to
strengthen performance incentives, but this approach fails to replace the
missing money at the root of the adequacy problem. Hogan’s energy-only market
fills this gap. On the other track, the short-term capacity markets (ICAP)
spawned long-term capacity market designs. In 2004, ISO New England proposed a
short-term market with hedged performance incentives essentially based on high
spot prices. In 2005 we developed for New England a forward capacity market with
load obligated to purchase a target level of capacity covered by an energy call
option. The two tracks have now converged on two conclusions: (1) High real-time
energy prices should provide performance incentives. (2) High energy prices
should be hedged with call options. We argue that two more conclusions are
needed: (3) Capacity targets rather than high and volatile spot prices should
guide investment, and (4) long-term physically based options should be purchased
in a forward market for capacity. The result will be that adequacy is
maintained, performance incentives are restored, market power and risks are
reduced from present levels, and prices are hedged down to a level below the
present price cap.
Combinatorial Auctions, (with
Yoav Shoham and Richard
Steinberg) MIT Press, 2006.
A comprehensive book on combinatorial auctions―auctions in which bidders can bid
on packages of items. The book consists of original
material
intended for researchers, students, and
practitioners of auction design. It includes a foreword by Vernon Smith, an
introduction to combinatorial auctions, and twenty-three cross-referenced
chapters in five parts. Part I covers mechanisms, such as the Vickrey auction
and the ascending proxy auction. Part II is on bidding and efficiency issues.
Part III examines computational issues and algorithmic considerations,
especially the winner determination problem―how to identify the (tentative)
winning set of bids that maximizes revenue. Part IV discusses implementation and
methods of testing the performance of combinatorial auctions, including
simulation and experiment. Part V considers four important applications: airport
runway access, trucking, bus routes, and industrial procurement. The chapters
develop and apply a unified language, integrating ideas from economics,
operations research, and computer science. A glossary defines the central terms.
The contributors are Lawrence Ausubel, Michael Ball, Martin Bichler, Sushil
Bikhchandani, Craig Boutilier, Estelle Cantillon, Chris Caplice, Peter Cramton,
Andrew Davenport, George Donohue, Karla Hoffman, Gail Hohner, Jayant Kalagnanam,
Ailsa Land, Daniel Lehmann, Kevin Leyton-Brown, Dinesh Menon, Paul Milgrom,
Rudolf Müller, Noam Nisan, Eugene Nudelman, Joseph Ostroy, David Parkes,
Aleksandar Pekec, Martin Pesendorfer, Susan Powell, Amir Ronen, Michael
Rothkopf, Tuomas Sandholm, Ilya Segal, Yossi Sheffi, Yoav Shoham, Richard
Steinberg, Susara van den Heever, Thomas Wilson, and Makoto Yokoo.
"Introduction
to Combinatorial Auctions," (with
Yoav Shoham and Richard
Steinberg) in Peter Cramton,
Yoav Shoham, and Richard Steinberg (eds.),
Combinatorial Auctions,
1-13, MIT Press, 2006.
Combinatorial
auctions are those auctions in which bidders can place bids on combinations of
items, called “packages,” rather than just individual items. The study of
combinatorial auctions is inherently interdisciplinary. Combinatorial auctions
are in the first place auctions, a topic extensively studied by economists.
Package bidding brings in operations research, especially techniques from
combinatorial optimization and mathematical programming. Similarly, computer
science is concerned with expressiveness of various bidding languages, and
algorithmic aspects of the combinatorial problem. The study of combinatorial
auctions thus lies at the intersection of economics, operations research, and
computer science. In this book, we look at combinatorial auctions from all three
perspectives. Indeed, our contribution is to do so in an integrated and
comprehensive way. The first challenge in interdisciplinary research is getting
the different disciplines to speak the same language. We have made an effort to
use terms consistently throughout the book, with the most common terms defined
in the glossary.
"The Clock-Proxy Auction: A Practical Combinatorial Auction Design," (with Lawrence M. Ausubel
and Paul Milgrom) in Peter Cramton,
Yoav Shoham, and Richard Steinberg (eds.),
Combinatorial Auctions, Chapter 5,
115-138,
MIT Press, 2006. [Presentation]
We propose the clock-proxy auction as a practical means for auctioning many
related items. A clock auction phase is followed by a last-and-final proxy
round. The approach combines the simple and transparent price discovery of the
clock auction with the efficiency of the proxy auction. Linear pricing is
maintained as long as possible, but then is abandoned in the proxy round to
improve efficiency and enhance seller revenues. The approach has many advantages
over the simultaneous ascending auction. In particular, the clock-proxy auction
has no exposure problem, eliminates incentives for demand reduction, and
prevents most collusive bidding strategies.
"Simultaneous Ascending Auctions," in Peter Cramton, Yoav Shoham, and Richard
Steinberg (eds.),
Combinatorial Auctions, Chapter 4,
99-114,
MIT Press, 2006.
The simultaneous ascending auction has proved to be a successful method of
auctioning many related items. Simultaneous sale and ascending bids enable price
discovery, which helps bidders build desirable packages of items. Although
package bids are not allowed, the auction format does handle mild
complementarities well. I examine the auction design and its performance in
practice.
"Dynamic Auctions in Procurement," (with Lawrence M. Ausubel)
in Nicola Dimitri, Gustavo Piga, and Giancarlo Spagnolo (eds.) Handbook of
Procurement, Cambridge, England: Cambridge University Press, 2006.
We study the theory and practical implementation of dynamic procurement
auctions. We consider the procurement of many related items. With many related
items, price discovery is important not only to reduce the winner’s curse, but
more importantly, to simplify the bidder’s decision problem and to facilitate
the revelation of preferences in the bids. Three auction formats are considered:
simultaneous descending auctions are preferred if the items are not divisible,
simultaneous clock auctions are desirable for procuring many divisible goods,
and the clock-proxy auction is best if complementarities among items are strong
and varied across the suppliers. We examine the properties of these auctions and
discuss important practical considerations in applying them.
"How Best to Auction Oil Rights," in Macartan Humphreys, Jeffrey D. Sachs,
Joseph E. Stiglitz (eds.), Escaping the Resource Curse, Chapter 5,
114-151, New York: Columbia University Press, 2007.
I study the design of oil rights auctions. A good auction design promotes both
an efficient assignment of rights and competitive revenues for the seller. The
structure of bidder preferences and the degree of competition are key factors in
determining the best design. With weak competition and additive values, a
simultaneous first-price sealed-bid auction may suffice. With more complex value
structures, a dynamic auction with package bids, such as the clock-proxy
auction, likely is needed to promote the efficiency and revenue objectives.
Bidding on production shares, rather than bonuses, typically increases
government take by reducing oil company risk.
"New
England’s Forward Capacity Auction," University of Maryland, June 2006.
This note provides a brief description of New England’s Forward Capacity Auction
(FCA) for the procurement of electricity capacity. The description is based on
the 6 March 2006 Settlement Agreement. The description here presents a simpler
description of the auction mechanics, and limits the presentation to the key
elements relevant to someone providing software and other support to implement
the primary auction. In addition, some motivation for the approach is given. The
description here is not a software specification, but rather a high-level
description of the auction. Many implementation details are yet to be resolved.
These details will be resolved in the Market Rule for the Forward Capacity
Market.
"A Capacity Market that Makes Sense," (with
Steven Stoft) Electricity Journal, 18, 43-54, August/September 2005. [Presentation]
We argue that a capacity market is needed in most restructured electricity
markets, and present a design that avoids problems found in the early capacity
markets. The proposed market only rewards capacity that contributes to
reliability as demonstrated by its performance during hours in which there is a
shortage of operating reserves. The capacity price responds to market
conditions, increasing when and where capacity is scarce and decreasing to zero
when and where it is sufficiently plentiful. Market power in the capacity market
is addressed by basing the capacity price on actual capacity, rather than bid
capacity, so generators cannot increase the capacity price by withholding
supply. Actual peak energy rents (the short-run energy and reserve profits of a
benchmark peaking unit) are subtracted from the capacity price. This allows the
capacity market to more accurately control short-run profits and suppresses
market power in the energy market. This design both avoids and hedges energy
market risk, and by suppressing market power avoids regulatory risk. Risk
reduction saves consumers money as do the performance and investment incentives
inherent in the pay-for-performance mechanism.
"Review of the Proposed Reserve Markets in New England," (with
Hung-po Chao and
Robert Wilson) White Paper, Market
Design Inc., January 2005.
ISO New England proposes reserve markets designed to improve the existing
forward reserve market and improve pricing during real-time reserve shortages.
We support all of the main elements of the proposal. For example, we agree that
little is gained by allowing reserve availability bids in the day-ahead market.
Doing so greatly increases the complexity of the market without the prospect of
more efficient pricing. Rather, offline reserves are most efficiently priced and
awarded well in advance, as is done by the improved forward reserve market.
"Auctioning
Many Divisible Goods," (with Lawrence M. Ausubel)
Journal of the European Economic Association, 2, 480-493, April-May 2004.
We study the theory and practical implementation of auctioning many divisible
goods. With multiple related goods, price discovery is important not only to
reduce the winner’s curse, but more importantly, to simplify the bidder’s
decision problem and to facilitate the revelation of preferences in the bids.
Simultaneous clock auctions are especially desirable formats for auctioning many
divisible goods. We examine the properties of these auctions and discuss
important practical considerations in applying them.
"Competitive Bidding Behavior in Uniform-Price Auction Markets," Proceedings of the
Hawaii International Conference on System Sciences, January 2004.
Profit-maximizing bidding in uniform price auction markets involves bidding
above marginal cost. It therefore is not surprising that such behavior is
observed in electricity markets. This incentive to bid above marginal cost is
not the result of coordinated action among the bidders. Rather, each bidder is
independently selecting its bid to maximize profits based on its estimate of the
residual demand curve it faces. The supplier bids a price for its energy
capacity to optimize its marginal tradeoff between higher prices and lower
quantities. Price response from either demand or other suppliers prevents the
supplier from raising its bid too much. Profit maximizing bidding should be
expected and encouraged by regulators. It is precisely this profit maximizing
behavior that guides the market toward long-run efficient outcomes.
"Vickrey
Auctions with Reserve Pricing," (with Lawrence
M. Ausubel) Economic Theory, 23, 493-505, April 2004. Reprinted in Charalambos Aliprantis, et al. (eds.), Assets, Beliefs, and Equilibria in
Economic Dynamics, Berlin: Springer-Verlag, 355-368, 2003.
We generalize the Vickrey auction to allow for
reserve pricing in a multi-unit auction with interdependent values. In the
Vickrey auction with reserve pricing, the seller determines the quantity to be
made available as a function of the bidders’ reports of private information, and
then efficiently allocates this quantity among the bidders. Truthful bidding is
a dominant strategy with private values and an ex post equilibrium with
interdependent values. If the auction is followed by resale, then truthful
bidding remains an equilibrium in the auction-plus-resale game. In settings with
perfect resale, the Vickrey auction with reserve pricing maximizes seller
revenues.
"Competitive Bidding Behavior in Uniform-Price Auction Markets," Report
before the Federal Energy Regulatory Commission, March 2003.
Profit-maximizing bidding in uniform price auction markets involves bidding
above marginal cost. It therefore is not surprising that such behavior is
observed in electricity markets. Common bidding behavior such as “hockey stick”
bids easily are explained by suppliers determining their supply offers to
maximize profits. This incentive to bid above marginal cost is not the result of
coordinated action among the bidders. Rather, each bidder is independently
selecting its bid to maximize profits based on its estimate of the residual
demand curve it faces. Profit-maximizing bidding does not mean that “the sky’s
the limit.” Typically, bidders are limited in how high they want to bid. As
prices increase, operators become increasingly concerned that their capacity
will not be selected—that someone else will step in front of them in the merit
order. Only when (1) demand does not respond to price, and (2) the largest
unhedged block of capacity is essential to meet demand can the bidder holding
this largest block profitably name any price. In all other cases, the supplier
bids a price for its energy capacity to optimize its marginal tradeoff between
higher prices and lower quantities. Price response from either demand or other
suppliers prevents the supplier from raising its bid too much. Profit maximizing
bidding should be expected and encouraged by regulators. It is precisely this
profit maximizing behavior that guides the market toward long-run efficient
outcomes.
"Electricity
Market Design: The Good, the Bad, and the Ugly," Proceedings of the
Hawaii International Conference on System Sciences, January, 2003.
This paper examines principles of market design as
applied to electricity markets. I illustrate the principles with examples of
both good and bad designs. I discuss one of the main design challenges—dealing
with market power. I then discuss FERC’s choice of a standard market design.
"Collusive Bidding in the FCC Spectrum Auctions," (with Jesse Schwartz)
Contributions to Economic Analysis & Policy, 1:1,
www.bepress.com/bejeap/contributions/vol1/iss1/art11, 2002. [Presentation]
This paper describes the signaling that occurred
in many of the FCC spectrum auctions. The FCC's simultaneous ascending auctions
allowed bidders to bid on numerous communication licenses simultaneously, with
bidding remaining open on all licenses until no bidder was willing to raise the
bid on any license. Simultaneous open bidding allowed bidders to send messages
to their rivals, telling them on which licenses to bid and which to avoid. This
"code bidding" occurs when one bidder tags the last few digits of its
bid with the market number of a related license. Such bids can help bidders
coordinate a division of the licenses, and enforce the proposed division through
targeted punishments. Often the meaning of a bid is clear without attaching a
market number in the trailing digits. Such a "retaliating bid" need
not end in a market number to warn off a rival from a contested market. We
examine how extensively bidders signaled each other with retaliating bids and
code bids in the DEF-block PCS spectrum auction held from August 1996 through
January 1997. We find that only a small fraction of the bidders commonly used
these signals. The price differences between those markets where signaling did
and did not occur were negligible. However, bidders that used these collusive
bidding strategies won more than 40% of the spectrum for sale and paid
significantly less for their overall winnings, suggesting that the indirect
losses from code bidding and retaliation may be large.
"Demand Reduction and
Inefficiency in Multi-Unit Auctions," (with Lawrence M. Ausubel) Working Paper, University of
Maryland, July 2002. [Presentation]
Auctions typically involve the sale of many
related goods. Treasury, spectrum and electricity auctions are examples. In
auctions where bidders pay the market-clearing price for items won, large
bidders have an incentive to reduce demand in order to pay less for their
winnings. This incentive creates an inefficiency in multiple-item auctions.
Large bidders reduce demand for additional items and so sometimes lose to
smaller bidders with lower values. We demonstrate this inefficiency in an
auction model which allows interdependent values. We also establish that the
ranking of the uniform-price and pay-as-bid auctions is ambiguous in both
revenue and efficiency terms. Bidding behavior in spectrum auctions, electricity
auctions, and experiments highlights the empirical importance of demand
reduction.
"Spectrum Auctions," in Martin Cave, Sumit Majumdar, and Ingo Vogelsang, eds., Handbook
of Telecommunications Economics, Amsterdam: Elsevier Science B.V.,
Chapter 14, 605-639, 2002.
Auctions have emerged as the primary means of
assigning spectrum licenses to companies wishing to provide wireless
communication services. Since July 1994, the Federal Communications Commission
(FCC) has conducted 33 spectrum auctions, assigning thousands of licenses to
hundreds of firms. Countries throughout the world are conducting similar
auctions. I review the current state of spectrum auctions. Both the design and
performance of these auctions are addressed.
"Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," (with Suzi Kerr)
Energy Policy, 30, 333-345, 2002.
An auction of carbon permits is the best way to
achieve carbon caps set by international negotiation to limit global climate
change. To minimize administrative costs, permits would be required at the level
of oil refineries, natural gas pipe lines, liquid sellers, and coal processing
plants. To maximize liquidity in secondary markets, permits would be fully
tradable and bankable. The government would conduct quarterly auctions. A
standard ascending-clock auction in which price is gradually raised until there
is no excess demand would provide reliable price discovery. An auction is
preferred to grandfathering (giving polluters permits in proportion to past
pollution), because it allows reduced tax distortions, provides more flexibility
in distribution of costs, provides greater incentives for innovation, and
reduces the need for politically contentious arguments over the allocation of
rents.
"Pricing in the California Power Exchange Electricity Market: Should California
Switch from Uniform Pricing to Pay-as-Bid Pricing?" (with Alfred E. Kahn,
Robert H. Porter, and Richard D. Tabors), Blue Ribbon Panel Report, California
Power Exchange, January 2001.
"Uniform Pricing or Pay-as-Bid Pricing: A
Dilemma for California and Beyond," (with Alfred E. Kahn,
Robert H. Porter, and Richard D. Tabors), Electricity Journal, 70-79,
July 2001.
Any belief that a shift from uniform to as-bid
pricing would provide power purchasers substantial relief from soaring prices is
simply mistaken. The immediate consequence of its introduction would be a
radical change in bidding behavior that would introduce new inefficiencies,
weaken competition in new generation, and impede expansion of capacity.
"How Affirmative Action at the FCC Auctions
Decreased the Deficit," (with Ian Ayres) in Ian Ayres, ed., Pervasive
Prejudice? Unconventional Evidence of Race and Gender Discrimination,
Chicago: University of Chicago Press, 315-395, 2001.
"A
Review of Markets for Clean Air: The U.S. Acid Rain Program," Journal
of Economic Literature, 38, 627-633, September 2000.
"Eliminating the Flaws in New England's Reserve Markets," (with Jeffrey Lien)
Working Paper, University of Maryland, March 2000. [Presentation]
"Review of the Reserves and Operable Capability Markets: New England's
Experience in the First Four Months," White Paper, Market Design Inc., November 1999. [Figures
and Tables | Presentation]
I review the performance of the operating reserves
and the operable capability markets in New England. The review covers the first
four months of operation from May 1 to August 31, 1999. The review is based on my
knowledge of the market rules and their implementation by the ISO, and the
market data during this period, including bidding, operating, and settlement
information. In the review, I (1) identify the potential market flaws with these
markets, (2) look at the performance of the markets to see if the potential
problems have materialized, (3) evaluate the ISO's short-term remedies for these
market flaws, and (4) propose alternative medium-term solutions to the
identified problems. I find that the OpCap and reserve markets have serious
flaws that must be addressed. The ISO's short-term fixes have been necessary and
effective at addressing the immediate problems. However, better solutions can be
adopted in the medium term. In particular, I recommend (1) eliminate the OpCap
market, (2) establish a downward sloping demand curve for reserves, (3) pay the
clearing price to all resources that provide the service, (4) establish the true
real-time supply curve as simply the quantity of the resource made available in
real time, (5) establish back down bids in the TMSR market (bids would be
infrequent, perhaps monthly), (6) never set a price in the TMSR market less than
the largest lost opportunity cost, (7) continue to cascade the quantities of the
bids between operating reserve products, and (8) correct the classification of
off-line units that provide a service that looks and acts like TMSR. All of
these changes are consistent with the long-term solutions proposed for NEPOOL.
These changes represent an important step toward the long-term solution
involving multi-settlement energy and reserve markets. These markets should be
designed carefully to address the basic economic and engineering issues
necessary for an efficient wholesale electricity market.
"Collusive Bidding: Lessons from the FCC Spectrum Auctions," (with Jesse Schwartz)
Journal of Regulatory Economics, 17, 229-252, May 2000.
The Federal Communications Commission (FCC)
spectrum auctions use a simultaneous ascending auction design. Bidders bid on
numerous communication licenses simultaneously, with bidding remaining open on
all licenses until no bidder is willing to bid higher on any license. With full
revelation of bidding information, simultaneous open bidding allows bidders to
send messages to their rivals, telling them on which licenses to bid and which
to avoid. These strategies can help bidders coordinate a division of the
licenses, and enforce the proposed division by directed punishments. We explore
the extent that bidders signaled each other with retaliating bids in recent FCC
spectrum auctions. These strategies were used frequently by a small fraction of
the bidders, and were sometimes effective. Direct estimates of revenue losses
from these practices are inconclusive; however, bidders that used these
collusive bidding strategies paid significantly less, suggesting that the
indirect losses may be much larger. We examine solutions to mitigate collusive
bidding in the spectrum auctions, and then apply these ideas to the design of
daily electricity auctions.
"The Optimality of Being Efficient," (with Lawrence
M. Ausubel) Working Paper, University of Maryland, March 2001. [Presentation]
In an optimal auction, a revenue-optimizing seller
often awards goods inefficiently, either by placing them in the wrong hands or
by withholding goods from the market. This conclusion rests on two assumptions:
(1) the seller can prevent resale among bidders after the auction; and (2) the
seller can commit to not sell the withheld goods after the auction. We examine
how the optimal auction problem changes when these assumptions are relaxed. In
sharp contrast to the no resale assumption, we assume perfect resale: all gains
from trade are exhausted in resale. In a multiple object model with independent
signals, we characterize optimal auctions with resale. We prove generally that
with perfect resale, the seller's incentive to misassign goods is destroyed.
Moreover, with discrete types, any misassignment of goods strictly lowers the
seller's revenue from the optimum. In auction markets followed by perfect
resale, it is optimal to assign goods to those with the highest values.
"The
Role of the ISO in U.S. Electricity Markets: A Review of Restructuring in
California and PJM," (with Lisa
Cameron) Electricity Journal, 71-81, April 1999.
Several regions of the U.S. have sought to
restructure the electric power industry by separating the potentially
competitive generation sector from the natural monopoly functions of electricity
transmission and distribution. Under this restructuring scheme, a central
authority, which we will refer to as the independent system operator (ISO), is
given control over both the transmission system and the spot market for
electricity. The ISO's role in managing the spot market is relatively
uncontroversial. This is because the spot market takes place in real time and
requires continuous physical adjustments to electricity supply and demand
subject to complex constraints, such as the need to maintain voltage and
frequency within tight bands. Although the ISO's role in managing the spot
market is generally accepted, its role in scheduling and pricing generators
prior to actual dispatch was hotly debated during the development of
California's market and remains a contentious issue. Like other restructured
electricity markets, the California market requires generators to be scheduled
for operation on a day-ahead basis and allows for adjustments in these day-ahead
schedules up to an hour ahead of actual dispatch. However, the California ISO
has a minimal role in this scheduling process; almost all scheduling is carried
out by a number of competing scheduling coordinators, referred to as SCs. In
contrast, the ISO in the Pennsylvania New Jersey Maryland market (PJM) schedules
all generators that do not elect to schedule themselves. This paper discusses
the California and PJM approaches to shed light on the controversy over the
ISO's role in pre-dispatch phases of the market. Section I describes the
California market while Section II briefly reviews PJM. Section III outlines the
costs and benefits associated with limiting the ISO's role in the scheduling
phases of the market. Section IV summarizes recent experience in California and
PJM and offers conclusions.
"A Review of ISO New England's Proposed Market Rules," (with Robert
Wilson) White Paper, Market Design Inc., September 1998. [Presentation]
This report reviews the proposed rules for restructured wholesale electricity
markets in New England. We review the market rules, both individually and
collectively, and identify potential problems that might limit the efficiency of
these markets. We examine alternatives and identify the key tradeoffs among
alternative designs. We believe that the wholesale electricity market in New
England can begin on December 1, 1998. However, improvements are needed for
long-run success. We have identified four major recommendations:
- Switch to a multi-settlement system.
- Introduce demand-side bidding.
- Adopt location-based transmission congestion pricing, especially for the
import/export interfaces.
- Fix the pricing of the ten minute spinning reserves.
Maryland
Auction Conference, May 29-31, 1998.
An important economic development of the 1990s has been the restructuring of
infrastructure industries. Throughout the world, markets are replacing monopoly,
and private firms are increasingly providing goods and services that once were
provided by government. Auctions are playing a major role in this restructuring.
Auctions provide an efficient and transparent way for governments to allocate
scarce resources, for monopolies to divest their assets, and for services to be
traded. Applications are seen in every infrastructure industry:
telecommunications (e.g., the FCC spectrum auctions), electric power, natural
gas, water, air, and transportation. Treasury auctions are a related
application.
In the early 1990s, economists realized that existing auction theory was
inadequate for these applications. Although auction theory for the sale of a
single item is well developed, each of these applications involves the sale of
multiple items, often with value interdependencies among items. In response,
there has been a burst of research activity on auctions for multiple items. This
work is theoretical, experimental, and empirical.
This conference brings together about forty-five experts in the auction field
to present and discuss their research on auctions. The conference mixes
theorists, experimentalists, and empiricists. The common core is auctions and a
desire to apply auction ideas to these important real-world applications.
"Auctioning Securities," (with Lawrence M.
Ausubel) Working Paper, University of Maryland, March 1998.
Treasury debt and other divisible securities are
traditionally sold in either a pay-your-bid (discriminatory) auction or a
uniform-price auction. We compare these auction formats with a Vickrey auction
and also with two ascending-bid auctions. The Vickrey auction and the
alternative ascending-bid auction (Ausubel 1996) have important theoretical
advantages for sellers. In a setting without private information, these auctions
achieve the maximal revenue as a unique equilibrium in dominant strategies. In
contrast, the pay-your-bid, uniform-price, and standard ascending-bid auction
admit a multiplicity of equilibria that yield low revenues for the seller. We
show how these results extend to a setting where bidders have affiliated private
information. Our results question the standard ways that securities are offered
to the public.
Simultaneous
Ascending Auctions with Package Bidding, (with John
McMillan, Paul Milgrom, Bradley
Miller, Bridger Mitchell, Daniel
Vincent, and Robert Wilson) Report
to the Federal Communications Commission, March 1998.
An effective package bidding mechanism addresses
three problems: the exposure problem (the risks a bidder faces in trying to
construct an efficiently large combination of licenses), the free-rider problem
(the difficulties small bidders have in beating those who bid for larger
packages of licenses), and the computational complexity problem (which arises
from the fact that the number of possible combinations of licenses is much
larger than the number of licenses). Package bidding offers the possibility of
an improvement over individual-license bidding only when there are strong
complementarities and the pattern of those complementarities varies across
bidders. Package bidding works satisfactorily only when the auction rules have
been carefully designed to manage all three problems.
"Efficient Relocation of Spectrum Incumbents," (with Evan
Kwerel and John Williams) Journal
of Law and Economics, 41, 647-675, October 1998.
Changes in technologies and in
consumer demands have made prior radio spectrum allocations far from efficient.
To address this problem the FCC has recently reallocated spectrum for more
flexible use in bands that are partially occupied by incumbent license holders.
Often, it is necessary for the new license holder to relocate incumbents to make
efficient use of the spectrum. Regulations structuring the negotiation between
incumbent and new entrant can promote efficiency. In particular, giving the new
entrant the right to move the incumbent with compensation can reduce negotiation
costs and promote efficiency when there is private information about spectrum
values but good public information about the cost of relocating the incumbent.
We examine the experience of broadband PCS entrants in relocating microwave
incumbents. We conclude with some remarks on how these ideas might be applied to
digital television spectrum.
"The Distributional Effects of Carbon Regulation," (with Suzi
Kerr) in Thomas Sterner (ed.) The Market and the
Environment, Cheltenham, United Kingdom: Edward Elgar, chapter 12, 1999.
We examine the distributional effects of carbon
regulation. An auction of carbon permits is the best way to achieve carbon caps
set by international negotiation to limit global climate change. An auction is
preferred to grandfathering (giving polluters permits in proportion to past
pollution), because it allows reduced tax distortions, provides more flexibility
in distribution of costs, provides greater incentives for innovation, and
reduces the need for politically contentious arguments over the allocation of
rents.
"Ascending Auctions," European Economic Review, 42:3-5,
745-756, May 1998. [Presentation]
A key question of auction design is
whether to use an ascending-bid or a sealed-bid format. The critical distinction
between formats is that an ascending auction provides the bidders with
information through the process of bidding. This information is a two-edged
sword. It may stimulate competition by creating a reliable process of price
discovery, by reducing the winner’s curse, and by allowing efficient
aggregations of items. Alternatively, the information may be used by bidders to
establish and enforce collusive outcomes. Ex ante asymmetries and weak
competition favor a sealed-bid design. In other cases, an ascending auction is
likely to perform better in efficiency and revenue terms. Moreover, information
in an ascending auction can be tailored to limit collusion.
"The Efficiency of the FCC Spectrum Auctions," Journal of Law and
Economics, 41, 727-736, October 1998.
From July 1994 to July 1996, the Federal
Communications Commission (FCC) conducted nine spectrum auctions, raising about
$20 billion for the U.S. Treasury. The auctions assigned thousands of licenses
to hundreds of firms. Were the auctions efficient? Did they award the licenses
to the firms best able to turn the spectrum into valuable services for
consumers? There is substantial evidence that the FCC's simultaneous ascending
auction worked well. It raised large revenues. It revealed critical information
in the process of bidding and gave bidders the flexibility to adjust strategies
in response to new information. As a result, similar licenses sold for similar
prices, and bidders were able to piece together sensible sets of licenses.
"Auctions and Takeovers," New Palgrave Dictionary of Economics and the Law,
Peter Neuman (ed.), London: MacMillan Press, 1, 122-125, 1998.
Under Delaware law (the predominant corporate law
in the US), when a potential acquirer makes a serious bid for a target, the
target's board of directors is required to act as would "auctioneers
charged with getting the best price for the stock-holders at a sale of the
company." (Revlon v. MacAndrews & Forbes, 173). The target's board may
not use defensive tactics that destroy the auction process and must attempt to
seek higher bids. Similarly, the Williams Act requires takeover bids to remain
open for at least 20 business days on the grounds that the delay facilitates
auctions. This preference for auctions follows from the view that auctions
maximize shareholder returns. In addition, auctions promote efficiency by
shifting corporate assets into the hands of those that value them most highly.
And auctions mitigate the collective action problem of target shareholders by
requiring the target board to seek the highest bid. Takeover auctions differ
from traditional auctions in important respects. In a traditional auction, the
seller describes what is being sold and states the auction rules in a public
announcement. Takeover auctions are instead prompted by a potential buyer. Only
after the buyer has expressed an interest in the target are bids from others
sought. The process is governed not by a fixed set of auction rules specified by
the seller, but rather by complex takeover regulations, which give the target
board some latitude in the process. The process is typically not stated in
advance, but evolves as bidders and bids arrive. For the most part, the
regulations provide ways to defend against hostile takeovers with poison pills,
greenmail, and other tactics. Despite these differences, to a first
approximation takeovers are well modeled as an ascending-bid auction with
significant participation costs. This essay begins by looking at takeover
auctions from the point of view of a buyer, focusing on bidding strategy. Then
strategies of the target are discussed. Finally, the desirability of takeover
auctions is addressed.
Package
Bidding for Spectrum Licenses, (with John
McMillan, Paul Milgrom, Bradley
Miller, Bridger Mitchell, Daniel
Vincent, and Robert Wilson) Report
to the Federal Communications Commission, October 1997.
The FCC was an innovator in adopting the rules of
the simultaneous ascending-price auction for its sales of spectrum licenses.
While these rules have performed well in the auctions conducted so far (and
would perform even better with the design improvements suggested in our first
report), there are two inherent limitations in any design that seeks to assign
and price the licenses individually. First, such designs create strategic
incentives for bidders interested in multiple licenses that are substitutes to
reduce their demands for some of the licenses in order to reduce the final
prices of the others; this is the demand reduction problem. Second, even if
bidders behave non-strategically, there is a fundamental problem with the basic
concept of individual-license pricing when licenses are complementary. In
simultaneous ascending-price auctions, from a bidder's perspective this is the
exposure problem. A bidder who is unsuccessful in bidding for a large package of
licenses may be left with a partial package whose total price cannot be
justified in the absence of those complementary licenses it failed to win. This
problem is present in any auction mechanism that sells licenses individually,
with no opportunity to bid on packages. In this report our task is confined to
analyses of the merits of package bidding and the practical problems of
implementation. In our next report, we will outline proposals for the details of
the procedural rules and other aspects of implementing a practical design, as
well as the software development that would be necessary.
Auction
Design Enhancements for Non-Combinatorial Auctions, (with John
McMillan, Paul Milgrom, Bradley
Miller, Bridger Mitchell, Daniel
Vincent, and Robert Wilson) Report
to the Federal Communications Commission, September 1997.
We evaluate a number of possible enhancements to
the FCC auctions. We consider only changes to the current auction rules that
stay within the basic format of the simultaneous multiple round auction for
individual licenses. This report summarizes and extends our e-mail exchanges
with FCC staff on this topic. A subsequent report will cover auctions with
combination bids. Overall, the FCC spectrum auctions have been an enormous
success. However, there are two design goals in the auction where important
improvement can be achieved within the basic rules structure. These are
restricting collusion among bidders and reducing the time taken to complete the
auction. This report focuses on enhancements that help to achieve these two
goals. Some of the suggested changes also streamline the auction process so
large auctions can be conducted more quickly without sacrificing efficiency.
"The
FCC Spectrum Auctions: An Early Assessment," Journal of
Economics and Management Strategy, 6:3, 431-495, 1997. Reprinted in Donald
L. Alexander (ed.), Telecommunications Policy, Praeger Publishers,
1997.
This paper analyzes six spectrum
auctions conducted by the Federal Communications Commission (FCC) from July 1994
to May 1996. These auctions were simultaneous multiple-round auctions in which
collections of licenses were auctioned simultaneously. This auction form proved
remarkably successful. Similar items sold for similar prices and bidders
successfully formed efficient aggregations of licenses. Bidding behavior
differed substantially in the auctions. The extent of bidder competition and
price uncertainty played an important role in determining behavior. Bidding
credits and installment payments also played a major role in several of the
auctions.
"Synergies in Wireless Telephony: Evidence from the Broadband PCS Auctions," (with
Lawrence M. Ausubel, R.
Preston McAfee, and John McMillan) Journal
of Economics and Management Strategy, 6:3, 497-527, 1997. [Data]
We examine bid data from the first
two broadband PCS spectrum auctions for evidence of value synergies. First, we
estimate a benchmark regression for the determinants of final auction prices.
Then, we include variables reflecting the extent to which bidders ultimately won
or already owned the adjacent wireless properties. Consistent with geographic
synergies in an ascending-bid auction, prices were higher when the
highest-losing bidder had adjacent licenses. The footprints of winning bidders
suggest that they were often successful in realizing these synergies.
"Auction Design for Standard Offer Service," (with Andrew
Parece and Robert Wilson) Working
Paper, University of Maryland, July 1997. [Auction
Rules]
During the transition to a competitive electricity
market, when a consumer does not select an electricity provider, who provides
service to the customer and at what price? An auction for this "standard
offer service" is a market-based way to assign the service responsibility
and to determine its price. We explore the design issues in establishing rules
for such an auction.
"Using Auctions to Divest Generation Assets," (with Lisa
J. Cameron and Robert Wilson) Electricity
Journal, 10:10, 22-31, December 1997.
In most states, ratepayers will compensate
utilities for their stranded costs. As a result, these costs must be measured as
accurately as possible, in a manner that is easily understood by all concerned
parties. We describe the options for measuring stranded costs and argue that a
simultaneous ascending auction is the best approach.
"Deficit Reduction Through Diversity: How Affirmative Action at the FCC
Increased Auction Competition," (with Ian Ayres) Stanford
Law Review, 48:4, 761-815, 1996.
In recent auctions for paging
licenses, the Federal Communications Commission has granted businesses owned by
minorities and women substantial bidding credits. In this article, Professors
Ayres and Cramton analyze a particular auction and argue that the affirmative
action bidding preferences, by increasing competition among auction
participants, increased the government’s revenue by $45 million. Subsidizing
the participation of new bidders can induce established bidders to bid more
aggressively. The authors conclude that this revenue-enhancing effect does not
provide a sufficient constitutional justification for affirmative action—but
when such justification is independently present, affirmative actions can cost
the government much less than is currently thought.
"Money Out of Thin Air: The Nationwide Narrowband PCS Auction," Journal
of Economics and Management Strategy, 4, 267–343, 1995.
The Federal Communications
Commission held its first auction of radio spectrum at the Nationwide Narrowband
PCS Auction in July 1994. The simultaneous multiple-round auction, which lasted
five days, was an ascending bid auction in which all licenses were offered
simultaneously. This paper describes the auction rules and how bidders prepared
for the auction. The full history of bidding is presented. Several questions for
auction theory are discussed. In the end, the government collected $617 million
for ten licenses. The auction was viewed by all as a huge success—an excellent
example of bringing economic theory to bear on practical problems of allocating
scarce resources.
"The Case for Affirmative Auction: From Conscience to Coffers," (with Ian
Ayres) New York Times, 21 May 1995, F13.
The Federal Communications Commission’s auction
of wireless communication licenses last fall has been criticized as a huge
Government giveaway because of the substantial bidding preferences granted to
women and minorities. In March, Federal court action delayed the FCC’s June
auction until August to consider the legality of similar preferences. But far
from being a giveaway, affirmative action actually increased the total amount
paid to the Government by about $15 million. Women and minority bidders were
granted a 40 percent bidding credit on certain licenses and the right to pay the
Government in installments over 10 years at a favorable rate. The combined
effect was that these favored bidders only had to pay the Government 50 percent
of any winning bid. So how could such subsidies have raised the total auction
revenue? The answer is that giving preferences to relatively weak bidders can
induce strong bidders to bid higher. The extra revenue the Government gets from
the strong bidders can more than offset the subsidy to the weaker bidders.
"Using Auction Theory to Inform Takeover Regulation," (with Alan Schwartz) Journal
of Law, Economics, and Organization, 7, 27–53, 1991.
This paper focuses on certain
mechanisms that govern the sale of corporate assets. Under Delaware law, when a
potential acquirer makes a serious bid for a target, the target’s Board of
Directors is required to act as would "auctioneers charged with getting the
best price for the stock-holders at a sale of the company.’’ The Delaware
courts’ preference for auctions follows from two premises. First, a firm’s
managers should maximize the value of their shareholders’ investment in the
company. Second, auctions maximize shareholder returns. The two premises
together imply that a target’s board should conduct an auction when at least
two firms would bid sums that are nontrivially above the target’s prebid
market price.
"Dissolving
a Partnership Efficiently," (with Robert
Gibbons and Paul
Klemperer) Econometrica, 55, 615–632, 1987. Reprinted in Paul
Klemperer (ed.), The Economic Theory of Auctions, Volume 2, Cheltenham,
UK: Edward Elgar, 2000.
Several partners jointly own an
asset that may be traded among them. Each partner has a valuation for the asset;
the valuations are known privately and drawn independently from a common
probability distribution. We characterize the set of all incentive-compatible
and interim-individually-rational trading mechanisms, and give a simple
necessary and sufficient condition for such mechanisms to dissolve the
partnership ex post efficiently. A bidding game is constructed that achieves
such dissolution whenever it is possible. Despite incomplete information about
the valuation of the asset, a partnership can be dissolved ex post efficiently
provided no single partner owns too large a share; this contrasts with Myerson
and Satterthwaite’s result that ex post efficiency cannot be achieved when the
asset is owned by a single party.