Auctions are an efficient tool for the allocation of multiple units of multiple items such as carbon emission permits with varying periods of validity. But the choice of both format and sequence affect the efficiency and revenues of the auction. These are the central findings of an experimental study by Regina Betz, Ben Greiner, Sascha Schweitzer and Stefan Seifert, published in the October 2017 issue of the Economic Journal.
Their research notes that given the complexity of the auctions that governments use to allocate items from airwaves to fishing rights, economic theory alone is reaching its limits in making clear-cut recommendations on which rules and features should be applied such that the auction yields the highest efficiency or largest revenues. This increases the importance of empirical testing of auction rules, both in the field and in the laboratory, before implementing them in live auctions.
In this study, the authors focus on auctions of multiple items that are each sold in multiple units. One prominent example is a carbon emission permit, where in a typical auction, millions of single permits (one for each metric ton of greenhouse gas) are sold in different ''vintages'' (periods of validity). Many of those permits are allocated through auctions in the European Union, Switzerland, the United States (RGGI, NOx, California Cap and Trade) and other countries.
The study explores two features of such auctions in a laboratory experiment: whether different vintages should be sold simultaneously (in one big complicated auction) or sequentially (one by one); and whether the auction should be a sealed-bid auction (with bidders submitting their demands and willingness to pay secretly to the auctioneer) or an open price clock auction (where the auctioneer asks for bids while raising the publicly announced price).
The researchers invited more than 500 participants to experimental sessions in Australia and Germany. Participants were put in groups of 14 bidders each and were given values for permits (which could later be redeemed for cash in the event that the bidders purchased these permits in the auctions).
By varying the values for permits assigned to different bidders, the researchers could model different market scenarios. In the computer lab, participants entered their bids and were awarded the permits according to the specific auction rules. The researchers repeated the auctions to allow participants to learn how to bid and how to use the auction interface.
The experimental results confirm that auctions are an efficient tool for the allocation of multiple units of multiple items. But both the choice of auction format and sequence affect the efficiency and revenues of the auction.
When auctioning different vintages simultaneously, open price clock auctions outperform sealed-bid auctions in terms of efficiency and revenues. This advantage disappears when items are auctioned sequentially. In addition, auctioning sequentially has positive effects on total revenues across all auction formats.
Thus, if an auctioneer of this particular type of goods wants to maximise revenues, a sequential auction may be best, with the auction format playing a minor role. If other aspects convince the auctioneer to auction the items simultaneously, then an open price clock auction format may be best suited.
This study informed the Australian Labour government''s 2012 legislation on a carbon permit trading scheme, which was later scrapped in 2014 by the newly elected conservative government.
''Auction Format and Auction Sequence in Multi-item Multi-unit Auctions – An Experimental Study'' by Regina Betz, Ben Greiner, Sascha Schweitzer and Stefan Seifert is published in the October 2017 issue of the Economic Journal. Regina Betz is at the Zurich University of Applied Sciences. Ben Greiner is at WU Vienna. Sascha Schweitzer and Stefan Seifert are at the University of Bayreuth.