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1007/s10058-006-0006-z O R I G I NA L PA P E R

B. To look at review & biblio

**Retaliatory equilibria in a Japanese ascending auction for multiple objects
**

Gian Luigi Albano · Fabrizio Germano · Stefano Lovo

Received: 8 February 2005 / Accepted: 23 January 2006 / Published online: 23 June 2006 © Springer-Verlag 2006

Abstract We construct a family of retaliatory equilibria for the Japanese ascending auction for multiple objects and show that, while it is immune to many of the tacitly collusive equilibria studied in the literature, it is not entirely immune when some bidders are commonly known to be interested in a speciﬁc object. Keywords Ascending auctions for multiple objects · Clock auctions · FCC auctions · Collusion · Retaliation JEL Classiﬁcation C72 · D44 1 Introduction Simultaneous ascending auctions for multiple objects have been widely used for over a decade, most notably in the sale of spectrum licenses by the Federal Communications Commission (FCC) in the US, but also by corresponding agencies

G. L. Albano Department of Economics and ELSE, University College London, WC1E 6BT London, UK F. Germano (B ) Departament d’Economia i Empresa, Universitat Pompeu Fabra, 08005 Barcelona, Spain e-mail: fabrizio.germano@upf.edu S. Lovo HEC, Finance and Economics Department, 78351 Jouy-en-Josas, France

Suppose two objects are put for sale to two bidders. Among other things. these auction formats typically ensure a transparent bidding process leading to extensive information revelation of bidders’ valuations and reasonably efﬁcient aggregations of the objects among the bidders. Let 1 Cramton and Schwartz (2000. Bundle and unit bidders draw their values independently from some smooth distribution F with positive density f . the unit bidder actively bids on object 2. and a unit bidder interested only in object 1. Albano et al. though he has zero value for it. On the other hand.1 When few bidders are competing for few objects. Albano et al. nonetheless exist in the JAMO. Their logic is as follows. The two bidders have overlapping interests on object 1. we refer to the unit bidder’s behavior as retaliatory strategy. for auction formats close to the FCC’s. in particular. We show that the JAMO admits equilibria with such strategies. 2002). Salmon (2004) contains a survey of collusive equilibria in ascending auctions. a bundle bidder interested in both objects. (related to ones reported in Cramton and Schwartz 2000. In spite of the different variations adopted. there are equilibria where bidders can coordinate a division of the available objects at very low prices. the more transparent the bidding process the easier it is for bidders to exploit the auction rules and to (tacitly) communicate and coordinate on collusive outcomes. 2002) have a detailed analysis of the signaling that took place dur- ing the US Federal Communication Commission’s DEF auction. throughout Europe and in several other countries. However. This note shows that collusive equilibria of a retaliatory type. and (b) closing is object-by-object. which is basically a clock version of the FCC auction mechanisms and differs from them in that (a) prices are exogenously raised by the auctioneer. Engelbrecht-Wiggans and Kahn (2005) and Brusco and Lopomo (2002) show that. namely the Japanese auction for multiple objects (JAMO). they show that because of these two features all the collusive “lowrevenue” equilibria constructed by Engelbrecht-Wiggans and Kahn (2005) and Brusco and Lopomo (2002) are not possible in the JAMO. . L. 2 A Japanese ascending auction 2. 2006) study a variant of the simultaneous ascending auction. the unit bidder wants the bundle bidder to exit early from object 1. Such a strategy is potentially costly to both the unit and the bundle bidder. The extent to which the unit bidder is successful in inducing the bundle bidder to drop early from object 1 depends on whether he succeeds in making his threat credible. the incentives to reduce demands and hence prices may be large. 1]. both deﬁned over [0. (2001. In order to achieve this. Assume this to be common knowledge.1 Framework Two objects are auctioned to a set of participants of two types: M ≥ 1 bundle bidders who are interested in both objects and one unit bidder interested in object 1 only.2 G.

the clock (price) temporarily stops on both objects giving the opportunity to other bidders to exit at the same price. bundle and unit. assume also all values are drawn according to a cumulative distribution function F on [0. where t1 is the bundle bidder’s exiting time from object 1. then the unit bidder holds that Pr(x > u1 ) = 1. Example 1 Consider the JAMO with two objects and two bidders. with u2 = 0. 2 to a bundle and to a unit bidder respectively. In equilibrium. the exit is irrevocable. with the same value for the two objects. Whenever an agent exits one object. The overall auction ends when all agents but one have dropped out from all objects. t1 ). The nature of bidders. The value of the bundle vB to a bundle bidder is vB = v1 + v2 . 1] 1 satisfying 0 udF(u) ≥ 1/2. (2001. The last agent receives the object at the price at which bidding on that object stopped. More in detail. presented in order of generality.Retaliatory equilibria in a Japanese ascending auction for multiple objects 3 vk and uk denote the value of object k = 1. given . the bundle bidder immediately drops out of object 1 inducing the unit bidder to also immediately drop out of object 2. Once an agent has dropped from a given object. one unit bidder interested in object 1 and one bundle bidder interested in both objects 1 and 2. 2006). 2. Proposition 1 There exist Perfect Bayesian Equilibria of the JAMO where bidders use retaliatory strategies effectively. in which case the price on that object stops and continues to rise on the remaining ones. • Out-of-equilibrium-path beliefs: if at time t > 0 the bundle bidder is active on object 1.2 The auction mechanism We consider a Japanese (or English clock) auction for multiple objects. The following constitutes a PBE of the JAMO: • All types of the unit bidder bid on both objects and stay on object 1 until u1 2 2 and on object 2 until min(u1 . • All types of the bundle bidder exit from object 1 at t if at t the unit bidder is active on object 2. is also commonly known. We show this by means of the following two examples. The number and the identity of agents active on any object is publicly known at any given time. this auction is also studied in Albano et al. We refer to this mechanism as the Japanese auction for multiple objects (JAMO). Prices start from zero on all objects and are simultaneously and continuously increased until only one agent is left on a given object. v1 = v2 = x. 3 Retaliatory equilibria Our results are summarized as follows. otherwise all types of the bundle bidder stay on both objects until x.

1/3. 2/3 and 0 vs. 1/6. Thus 0 udF(u) ≥ 1/2 is a sufﬁcient condition for x(F(x) − 1/2) ≤ x ˆ udF(u) to hold for all x > x. Let us now check that 0 udF(u) ≥ 1/2 is a necessary x and sufﬁcient condition for 2 0 F(u)du ≤ x to hold for all x ∈ [0. First. 2006). The stated out-of-equilibrium-path beliefs ensure that it is weakly optimal for the unit bidder to stay on both objects at most until u1 as long as the bundle bidder does not exit object 1. To see sufﬁciency (“if”). Morex x over. 1]. L. suppose that. while the other agents (here the bundle bidder and the auctioneer) are both worse off (1/2 vs. the unit bidder needs to resort to a more reﬁned threat. the ﬁrst derivative of x(F(x) − 1/2) is greater than the one of 0 udF(u) ˆ for all x > x. c (1) 2 For such “competitive” equilibria see Brusco and Lopomo (2002) and Albano et al. the retaliating bidder (here the unit bidder) obtains a higher ex ante payoff than in the “competitive” equilibrium2 (1/2 vs. for F uniform). Albano et al. at t = 0 the bundle bidder’s expected payoff from x staying on both objects until x is equal to 2 0 F(u)du. the unit bidder’s strategy. (2001. given such out-of-equilibrium beliefs. notice that x x 1 2 0 F(u)du ≤ x ⇔ x(F(x) − 1/2) ≤ 0 udF(u). the bundle bidder is active on both objects at t > 0. contrary to the equilibrium strategy. for F uniform). her payoff is x. . Example 2 Consider the case of a unit bidder competing against an arbitrary number M of bundle bidders with private values distributed according to a general distribution function F deﬁned on [0. respectively. the unit bidder expects the bundle bidder to win object 2 for sure. To see necessity (“only if”). Indeed.4 G. Take l ∈ (0. whereas if she exits object 1 at t = 0. note that x(F(x) − 1/2) is bounded above by 1/2. 1]. The above example relies on the fact that the unit bidder has some extra information about the bundle bidder’s valuation of object 1 relative to object 2 (the values are perfectly correlated) and on the fact that in expectation his valuation for object 1 is sufﬁciently large to make the threat of retaliation credible. 1] and let c < l be the unique solution to the equation l 1 z · G (z)dz = c · G(l). 1 Thus the inequality implies that 0 udF(u) ≥ 1/2. note ˆ ˆ that x(F(x)−1/2) is positive for all x > x. Without this information and for a more general distribution of u1 . 0 Finally. As is often typical in such retaliatory equilibria. where x is such that F(ˆ ) = 1/2.

As a consequence the threshold c must increase with M. the following is a PBE of the JAMO: • All types of unit bidder with u1 ≤ l bid only on object 1 and stay until u1 .e. all types of bundle bidder with v1 ≥ l bid on both objects always staying until v1 . • If the unit bidder is active on the two objects. • If the unit bidder is active only on object 1 then all types of bundle bidder stay until v1 . to ensure incentive compatibility for the unit bidder. When l = 1 we get the competitive equilibrium. Note that the equilibria are not in undominated strategies. These examples are related to the collusive equilibria of Brusco and Lopomo (2002) in the sense that bundle and unit bidders have overlapping interests on object 1. to be active) on object 2 if bundle bidders do not exit object 1. • If the unit bidder is active on both objects and quits object 2 at t < c. The signaling is effective since it is common knowledge that the retaliatory bidder is interested in one object only. This characterizes a family of retaliatory equilibria indexed by the parameter l that are PBE of the JAMO. the bundle bidders hold that Pr(1 − δ ≤ u1 ≤ 1) = 1. The threshold c is chosen such that only a unit bidder with u1 > l has an incentive to pay this cost. v2 . for any l ∈ (0. he must bid on object 2 up to the threshold c.Retaliatory equilibria in a Japanese ascending auction for multiple objects 5 where G = F M is the distribution function for the bundle bidders’ highest valuation for object 1 (and also for 2). respectively.. since c → 0. If the unit bidder is active on both auctions this signals that his valuation is above the threshold l. Note that as the number M of bundle bidders increases. that is. the other bidders hold that Pr(v2 > c) = 1. since with probability one the unit bidder will not be active on object 1. for δ small. the unit bidder enters both auctions but almost immediately exits object 2. by remaining active on both objects. the unit bidder . then u1 ≤ l. Unlike the equilibrium of Example 1. u1 > l. 1]. since the unit bidder always has a (weakly) dominant strategy to drop from object 2 whenever it is the only object he is bidding on. the unit bidder provides a credible signal that he actually has a high valuation for object 1. and all bidders bid up to their valuations and only on the objects they value. • Out-of-equilibrium-path beliefs: • If a bundle bidder quits object 1 at t < c when the unit bidder is active on both objects. if he bids only on object 1. the unit bidder threatens to retaliate (i. When l → 0 we almost get the competitive equilibrium. then all types of bundle bidder with v1 < l bid on both objects and stay on object 1 until c and on object 2 until v2 . the probability that the unit bidder wins object 2 during the retaliatory phase decreases. Thus. all types of unit bidder with u1 > l bid on both objects and stay on object 1 until u1 and on object 2 until c. that is. here. Thus by not “turning the light off” on object 2 when the price is zero. Then. v2 on object 1 and 2 respectively. This is costly for the unit bidder as he wins the object he does not value (object 2) with positive probability.

Hence. When the unit bidder is not active on object 2 and still active on object 1. Suppose now that. whereas if y1 > l and the unit bidder is still active on object 1. however. at time 0 the unit bidder decides to bid only on object 1. 2}. If u1 < c. if y1 ≤ l. exiting object 1 at time c and exiting object 2 at v2 is a (weak) best reply for such a bundle bidder. In this case. When the unit bidder is active on object 2. so that being active on both objects gives a credible signal that u1 > l. L.6 G. bundle bidders infer that u1 > l. In particular. Hence we focus on the case u1 ≥ c. This proves that the bundle bidders’ strategy is a best reply to the unit bidder’s strategy. then we check it for the unit bidder. The second integral is the expected payoff from object 2: if y2 < c. Suppose that u1 ∈ [c. In the JAMO. Recall that the bundle bidder with the highest valuation for object 2 will exit auction 2 before c only if y2 < c. the bundle bidder with the highest valuation for object 1 will exit auction 1 at y1 . that is. v1 > l. The ﬁrst integral is the unit bidder’s payoff from object 1: the unit bidder wins object 1 only if y1 < l. Therefore. then the bundle bidder with the highest valuation for object 1 will exit auction 1 at c. 1] denote the bundle bidders’ highest valuation for object k ∈ {1. then it is clearly not optimal for the unit bidder to bid on both objects since he will have to pay at least c for object 1. then the bundle bidder with the highest valuation for object 1 will exit auction 1 at y1 . these equilibria are implementable in the JAMO and thus do not require actual rounds of information exchanges. Hence. If the unit bidder is active on both objects. then his expected payoff is 0 (u1 − c) · G (y1 )dy1 − 0 y2 · G (y2 )dy2 . Namely. in order to signal the retaliatory strategy the unit bidder has to be active on both objects. the bundle bidder were to exit object 1 before c in order to induce the unit bidder to immediately exit object 2. we need to show that the unit bidder’s strategy is a best reply and that it is proﬁtable for the unit bidder to bid on both objects if and only if u1 > l. Let yk ∈ [0. Unlike Brusco and Lopomo. u his expected payoff is 0 1 (u1 − y1 )G (y1 )dy1 . bidders do not (and cannot) raise prices on most preferred objects as in Brusco and Lopomo. If. thus having to adopting a more costly strategy. and let G denote the corresponding distribution function. then a bundle bidder is better off remaining on each object so long as her expected continuation payoff remains strictly positive. triggers the beliefs that sustain the retaliatory equilibrium. l]. a bundle bidder with v1 ≤ l knows that she will never pay for object 1 less than what she values this object. (recall that u1 ≤ l) and he pays c. Proof of Example 2 We ﬁrst check optimality for any bundle bidder. If. which is also likely to be overall less costly for the auctioneer. . that the equilibrium is incentive compatible. then he has to buy object 2 at a price y2 . if the unit bidder believes (out of the equilibrium path) that v2 > c. To prove optimality for the unit bidder. Albano et al. however. respectively. she will stay on objects 1 and 2 until v1 and v2 . exiting object 1 before c is not a proﬁtable deviation for the bundle bidder. If the unit bidder decides to implement the retaliatory l c strategy. contrary to the equilibrium strategy. then he nonetheless ﬁnds it weakly optimal to exit object 2 at c.

It is easy to check that the above inequality is satisﬁed for any l ∈ (0. that is. (1). the following needs to be satisﬁed l c u1 (u1 − c) · G (y1 )dy1 − 0 0 y2 · G (y2 )dy2 ≤ 0 (u1 − y1 ) · G (y1 )dy1 . the unit bidder’s expected payoff from the retaliatory strategy must be greater or equal than the payoff from bidding only on object 1. which is always satisﬁed when c solves Eq. that is. that is. l u1 (u1 − c) · G (y1 )dy1 + 0 c l u1 (u1 − y1 ) · G (y1 )dy1 − 0 y2 · G (y2 )dy2 ≥ 0 (u1 − y1 ) · G (y1 )dy1 . Therefore the expected payoff for the unit bidder from quitting the retaliatory strategy at t ∈ (0. It must be optimal for the unit bidder to insist on his retaliatory strategy. to exit object 2 at c rather than before c. Since the left hand side of inequality (2) is increasing in u1 . c). even if v1 < 1 − δ. Suppose that the unit bidder deviates and exits object 2 at t ∈ (0.Retaliatory equilibria in a Japanese ascending auction for multiple objects 7 At equilibrium we want the unit bidder to bid only on object 1 when u1 ≤ l. at t = 0. Suppose now u1 > l. 1]. Given the bundle bidders’ out-of-equilibrium-path beliefs. it is sufﬁcient to check it for u1 = l. This expected payoff must be smaller than the unit bidder’s expected payoff from insisting with the retaliatory strategy. Then. Indeed. (recall that y1 and y2 have the same distribution function G). Consider now any time t < c. Hence we have to check that c (l−c)G(l)− t y2 ·G (y2 |y2 > t)dy2 > 0. c). l u1 (u1 − c) · G (y1 )dy1 + 0 c l (u1 − y1 ) · G (y1 )dy1 − t y2 · G (y2 |y2 > t)dy2 > 0 (2) for all u1 > l and for all t ∈ (0. v1 }. a weakly dominant continuation strategy for a bundle bidder with type v1 following a deviation of the unit bidder is to exit object 1 at τ = max{1 − δ. Since G (y2 |y2 > t) = G (y2 )/(1−G(t)) . that is. the bundle bidder expects not to have to buy object 1 at 1 − δ since she anticipates that the unit bidder will exit at u1 > L. c) and continuing optimally on object 1 can be ﬁxed arbitrarily close to 0 by choosing δ sufﬁciently close to 0.

Lopomo G (2002) Collusion via signaling in open ascending auctions with multiple objects and complementarities. L.8 G. (1) and after rearranging terms l we have −cG(c) = (c − l)G(l) + c G(z)dz. In: Janssen MCM (ed) Auctioning public assets: analysis and alternatives. Substituting this last expression into (3). as well as from BBVA grant “Aprender a jugar. Econ Lett 71:55–60 Albano GL. Cambridge . References Albano GL. Albano et al. Lovo S. (3) By integrating by parts the left-hand side of Eq. we have that the left-hand side of (3) is equal to l l G(z)dz − (l − c)G(t)G(l) + tG(t) > t c G(z)dz − (l − c)G(c) > 0. Acknowledgments We are grateful to Philippe Jehiel for useful discussions. Germano F (2006) Ascending auctions for multiple objects: the case for the Japanese design. The work was part of the programme of the ESRC Research for Economic Learning and Social Evolution. Kahn C (2005) Low revenue equilibria in simultaneous ascending price auctions. Econ Theory 28:331–355 Brusco S. Cambridge University Press. Rev Econ Stud 69:1–30 Cramton P. J Regul Econ 17:229–252 Cramton P. Germano acknowledges ﬁnancial support from the Spanish Ministry of Science and Technology grant SEJ2004-03619 and in form of a Ramón y Cajal Fellowship. Manag Sci 51:356–371 Salmon T (2004) Preventing collusion between ﬁrms in auctions. strictly increasing and bounded by 1.” The support of the Economic and Social Research Council (ESRC) is also gratefully acknowledged. Germano F (2001) A Comparison of standard multi-unit auctions with synergies. integrating by parts and simplifying. Schwartz J (2000) Collusive bidding: lessons from the FCC spectrum auctions. where the two inequalities follow from t < c < l and G being positive. Lovo S. Contrib Econ Anal Policy 1:1–11 Engelbrecht-Wiggans R. we need to show that c (l − c)G(l)(1 − G(t)) − t z · G (z)dz > 0. Schwartz J (2002) Collusive bidding in the FCC spectrum auctions.

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