Market Power and Welfare in Asymmetric Divisible Good Auctions

Abstract

We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders and present conditions under which a unique privately revealing equilibrium exists. We derive novel comparative static results highlighting that increases in transaction costs and noise in the signals of a group reinforce each other in making demand schedules of both groups steeper. If the correlation of values of the groups raises, as in a crisis situation, then the illiquidity effect is further reinforced. A “stronger” bidding group - which has more precise private information, faces lower transaction costs, and is more oligopsonistic - has more market power (price impact) and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Price impact and the deadweight loss may be negatively associated and market integration may reduce welfare. The results are consistent with the available empirical evidence.

Keywords: demand/supply schedule competition, private information, liquidity auctions, treasury auctions, electricity auctions

JEL Classification: D440, D820, G140, E580