Strategic Overbidding in Dynamic Auctions: Structural Estimation of Value of Synergy
Production and Operations Management · 2021 · Volume 30 · Issue 2
Abstract
In this study, we formulate and estimate a dynamic procurement auction game where bidder asymmetry due to synergy is endogenous. The seller sells multiple goods via a sequence of first-price auctions. While bidders areex-antesymmetric, the first-period winner has a valuation advantage as a result of such synergy in the second-period bidding game and becomes astrongbidder. This endogenous synergy creation leads to overbidding in the first-period auction relative to a static bidding game. We characterize the equilibrium in terms of the observed bid distribution and suggest a two-step estimation procedure. We apply our method to data on OCS oil-tract auctions. We find that the federal government recovers 52% of the “strong” buyers’ willingness to pay in the second period. Bidders perceive the value of synergy to be about 5% of their first period’s informational rent. Counterfactual experiments show that government revenue could have increased by about 27% under alternative selling mechanisms.
Keywords
endogenous asymmetry, dynamic auction estimation, test of asymmetry, copulas, synergy creation, value of synergy
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