DP6083 | Combination Bidding in Multi-Unit Auctions

Publication Date

14/02/2007

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

This paper considers the problem of identification and estimation in the first-price multi-unit auction. It is motivated by the auctions of bus routes held in London where bidders submit bids on combinations of routes as well as on individual routes. We show that submitting a combination bid lower than the sum of the bids on the constituent routes does not require cost synergies and can instead serve as a tool to leverage market power across the different routes. As a result, the welfare consequences of allowing combination bidding in the first price auction are ambiguous, and depend on the importance of the cost synergies. We provide conditions for non-parametric identification of the multidimensional private information in the multi-unit first price auction and derive partial identification results when they are not satisfied. We propose an estimation method consisting of two stages: In the first stage, the distribution of bids is estimated parametrically. In the second stage, the (set of) costs and distribution(s) of costs consistent with the observed behavior are inferred based on the first order conditions for optimally chosen bids. We apply the estimation method to data from the London bus routes market. We quantify the magnitude of cost synergies and assess possible efficiency losses arising in this market.