Demand Reduction and Inefficiency in Multi-Unit Auctions
Abstract
Auctions typically involve the sale of many related goods. Treasury, spectrum and electricity
auctions are examples. In auctions where bidders pay the market-clearing price for items won,
large bidders have an incentive to reduce demand in order to pay less for their winnings. This
incentive creates an inefficiency in multiple-item auctions. Large bidders reduce demand for
additional items and so sometimes lose to smaller bidders with lower values. We demonstrate
this inefficiency in an auction model which allows interdependent values. We also establish that
the ranking of the uniform-price and pay-as-bid auctions is ambiguous in both revenue and
efficiency terms. Bidding behavior in spectrum auctions, electricity auctions, and experiments
highlights the empirical importance of demand reduction.