Auctions of Homogeneous Goods with Increasing Returns

Authors: Elena Katok, Alvin E. Roth

Multi-unit auctions of goods that may have increasing returns to scale—i.e. goods such that bidders may value multiple units at a higher unit price than single units—present challenges for both auctioneers and bidders. We compare two commonly used auction formats for selling multiple homogeneous objects, both sometimes called “Dutch” auctions, in a set of value environments that potentially subject bidders to the “exposure” and “free riding” problems. We find that overall the descending price auction, best known for its use in the Dutch flower auctions, is robust and performs well in a variety of environments, although there are some situations in which the ascending uniform-price auction similar to the one used by internet auctions such as eBay, better avoids the free riding problem. We discuss the factors that influence each mechanism’s performance in terms of the overall efficiency, the informational requirements, the seller’s revenue, and the buyer’s profit.