DP4363 Underpricing and Market Power in Uniform Price Auctions

Author(s): Ilan Kremer, Kjell G Nyborg
Publication Date: April 2004
Keyword(s): discreteness, market power, multi-unit auctions, supply uncertainty, treasury auctions, underpricing, uniform price auctions
JEL(s): D44, G10
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4363

In uniform auctions, buyers choose demand schedules as strategies and pay the same ?market clearing? price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by allowing discrete prices, quantities and bids. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.