Front-Running and Candle Auctions

Abstract

This paper considers a dynamic single-good pay-as-bid auction where one bidder sees the other bids and can react to them before they are taken into account by the mechanism. In a two-bidder, IPV setting we show that a suitably chosen random ending time (a so-called candle auction) yields efficiency and is optimal in the class of auctions that always sell the good. Information leakages between bidders are pervasive in online environments. Candle auctions were widely used in the middle ages, but have since been largely forgotten.

Keywords: front-running, random ending time, auction

JEL Classification: D44, D82, G29, C72