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RFS Advance Access published online on October 15, 2003
Review of Financial Studies, doi:10.1093/rfs/hhg051
Review of Financial Studies © The Society for Financial Studies 2003; all rights reserved
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© 2003 The Society for Financial Studies

Original Articles

Underpricing and Market Power in Uniform Price Auctions

Ilan Kremer 1 and Kjell G. Nyborg 2*
1 Stanford University
2 University of California, Los Angeles; Centre for Economic Policy Research, London Business School

* To whom correspondence should be addressed. E-mail: kjell.nyborg{at}anderson.ucla.edu.


  Abstract

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 under-pricing. 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.


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