Auction designs play critical role in successful privatisations

August 15, 2002

Free Market Foundation

Governments that seek to maximize revenues from the sale of state-owned properties should pay particular attention to how their auctions are designed.

A recent paper by Oxford University economist Paul Klemperer stresses the need to encourage entry by bidders and discourage collusion among them.

Here are a few tips from his study:

Ascending-bid auctions, particularly when they involve only a few bidders, are particularly susceptible to collusion since participants can use early rounds to signal intentions.

In a German auction of mobile-phone spectrum several years ago, two participants encoded in their bids offers to compromise and threats to punish and each walked away with spectrum at a very low price.

Prior to auctions, companies have used news releases and interviews to scare away potential competitors and in the case of a Swiss auction, obtained valuable spectrum at a fraction of the expected price.

In an Australian sealed-bid auction for satellite television licenses, one company submitted several different bids on the same licenses and then, after winning, defaulted on the bids that were too high paying a price only slightly higher than the amount bid by the next highest bidder.

To avoid such pitfalls, Klemperer recommends the “Anglo-Dutch” auction. This employs an open, ascending bid-auction until only two bidders are left. Then they must go head-to-head with final sealed bids.

Source: Hal R. Varian (University of California at Berkeley), Economic Scene: Tales of Manipulation and Design Flaws From the Crypt of Auction History, New York Times, August 1, 2002; Paul Klemperer, What Really Matters in Auction Design (draft August 2001), Journal of Economic Perspectives, 2002.

For NYTimes text http://www.nytimes.com/2002/08/01/business/01SCEN.html
For Klemperer paper http://www.paulklemperer.org
For more on Markets http://www.ncpa.org/iss/eco/

FMF Policy Bulletin\7 August 2002