DP11731 Market Power and Welfare in Asymmetric Divisible Good Auctions

Author(s): Carolina Manzano, Xavier Vives
Publication Date: December 2016
Date Revised: November 2020
Keyword(s): demand/supply schedule competition, electricity auctions, liquidity auctions, market integration, private information, Treasury auctions
JEL(s): D44, D82, E58, G14
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11731

We analyze a divisible good uniform-price auction that features two groups, each with a finite number of identical bidders, who compete in demand schedules. In the linear-quadratic-normal framework, this paper presents conditions under which the unique equilibrium in linear demands exists and derives novel comparative statics results that highlight the interaction between payoff and information parameters with asymmetric groups. We find that the strategic complementarity in the slopes of traders' demands is reinforced by inference effects from prices, and display the role of payoff and information asymmetries in explaining deadweight losses. Furthermore, price impact and the deadweight loss need not move together and market integration may reduce welfare. The results are consistent with the available empirical evidence.