Market Power and Welfare in Asymmetric Divisible Good Auctions
47 Pages Posted: 1 Feb 2017
Date Written: December 2016
We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders. Equilibrium is unique, and the relative market power of a group increases with the precision of its private information but declines with its transaction costs. In line with empirical evidence, we find that an increase in transaction costs and/or a decrease in the precision of a bidding group's information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A “stronger” bidding group - which has more precise private information, faces lower transaction costs, and is more oligopsonistic - has more market power 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 dead-weight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Market power and the dead-weight loss may be negatively associated.
Keywords: demand/supply schedule competition, private information, liquidity auctions, treasury auctions, electricity auctions
JEL Classification: D440, D820, G140, E580
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