RFS Advance Access originally published online on October 15, 2003
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rev Fin 2004; 17:849-877
The Review of Financial Studies Vol. 17, No. 3 © 2004 The Society for Financial Studies; all rights reserved.
Underpricing and Market Power in Uniform Price Auctions
Stanford University
Centre for Economic Policy Research, UCLA Anderson School of Management
Address correspondence to Kjell G. Nyborg, UCLA Anderson School of Management, Box 951481, Los Angeles, CA 90095-1481, or e-mail: kjell.nyborg{at}anderson.ucla.edu.
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 letting prices, quantities, and bids be discrete. 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.