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22 - The Product-Mix Auction: A New Auction Design for Differentiated Goods

from Part III - Alternative Auction Designs

Published online by Cambridge University Press:  26 October 2017

By
Paul Klemperer
Edited by
Martin Bichler  and
Jacob K. Goeree
Paul Klemperer
Affiliation:
Department of Economics, University of Oxford
Martin Bichler
Affiliation:
Technische Universität München
Jacob K. Goeree
Affiliation:
University of New South Wales, Sydney
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Summary

The “Product-Mix Auction” is a single-round auction that can be used whenever an auctioneer wants to buy or sell multiple differentiated products. So potential applications include spectrum sales, and selling close-substitutes “types” of energy, as well as applications in finance such as the one discussed below.

The Product-Mix Auction effectively takes multiple single-round auctions that are each for (many units of) a single variety of the good, and combines all these auctions into one auction. Bidders express their relative preferences between varieties, as well as for alternative quantities of specific varieties, in simultaneous “sealed bids”. All the information from all the bids is then used, in conjunction with the auctioneer's own preferences, to set all the prices and the total quantities of all the goods allocated.

The Product-Mix Auction is like the “simultaneous multiple-round auction” (SMRA) in that both auctions find competitive equilibrium allocations consistent with the preferences that participants express in their bids. However, the Product-Mix Auction has several advantages over the SMRA. It is (obviously) much faster than an SMRA's iterative process (for example, the UK's 3G mobile-phone SMRA auction took 150 rounds over seven weeks), and it is therefore also simpler to use and less vulnerable to collusion. Moreover, unlike a standard SMRA, it allows the auctioneer as well as the bidders, to specify how the relative quantities of the different varieties to be sold should depend on their relative prices.

I invented the auction at the beginning of the financial crisis, in response to the 2007 Northern Rock bank run–Britain's first bank run since the 1800's. The Bank of England has used it regularly and successfully since, to improve its allocation of funds to banks, building societies, etc. In the Bank's auction, the different “types of goods” are loans of funds secured against different types of collateral, and the “prices” are interest rates, that is, the interest rate a borrower pays depends on the quality of the collateral it offers.

Type
Chapter
Information
Handbook of Spectrum Auction Design , pp. 462 - 476
Publisher: Cambridge University Press
Print publication year: 2017

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