Pre-auction investment and equivalence of auctions

Author: Guler, Kemal

Year: 1990

Degree: Dissertation (Ph.D.)

Advisor: McKelvey, Richard D.

Committee Members: McKelvey, Richard D.; Plott, Charles R.; Ledyard, John O.; Palfrey, Thomas R.

Option: Social Science

DOI: 10.7907/737d-qj73

Abstract

In this thesis we investigate some extensions of game theoretic auction models and models of R&D by allowing the participants' cost of producing an indivisible object to be determined by their R&D decisions prior to the auctioning of a fixed price production contract. We establish that when the production cost distributions are endogenously determined as a result of private investment expenditures which are only privately observable, first and second price auctions are equivalent: both give rise to the same level of total investment, same reserve price, same expected price to the buyer and same expected level of profits for the sellers, at the symmetric Nash equilibria. This is an extension of the equivalence results known in the context of standard independent private value auction models with risk neutral bidders. We also show using a discrete cost model that, when investment is observable, the requirement of subgame perfection eliminates the symmetric investment equilibrium from the set of equilibria in pure strategies, and the only pure strategy equilibria are asymmetric. The buyer's optimal response to this asymmetry in the investment equilibria is to reduce her reserve price so that equilibrium total investment level is lower when the buyer knows that the sellers know one another's investment levels. We also consider ex ante incentives to collude under first and second price auctions and find that equilibrium patterns of collusion differ significantly. Finally, we report some experimental results.

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