1 Allocation Mechanisms and Post-Allocation Interaction

In many traditional auctions, the seller or auctioneer is only interested in the price she gets for the auctioned objects. That is, the sole objective is to raise revenue. But, whenever the government sells some rights, it is often the case that the government is also interested in who will get the rights, and how the rights will be used. Generally speaking, when a market arises after an allocation mechanism is implemented (as it is the case with mobile telephony frequencies, radio frequencies or with the right to exploit gas stations along highways) the government is also interested in welfare issues related to the functioning of industry. Hence, the seller may try to establish already at the allocation stage conditions that ensure a future competitive market. Thus, whenever an auction affects the way a market functions, the seller (government) may have multiple objectives instead of just maximising revenue. One of the questions that arise is: how should these multiple objectives be ranked? For potential bidders there are also fundamental differences between participating in a traditional auction1 and participating in an auction, which, in a sense, gives the winner(s) an entry ticket to the market that arises afterwards. When there is a market after the auction, bidders may care about who (else) wins the auction and with what rights. This implies that their valuations are endogenous: they depend on the entire partition of objects among potential bidders. As a consequence of the ensuing strategic aspects, some of the fundamental results of traditional auction theory may fail to hold. In particular, the reasons for favouring auctions over beauty contests are not so clear-cut anymore