Asymmetric Auctions with Resale

In a first-price auction, asymmetries among bidders typically result in inefficient allocations— that is, the winner of the auction may not be the person who values the object the most. This inefficiency creates a motive for post-auction resale, and when bidders take resale possibilities into account, their bidding behavior is affected as well. Standard models of such auctions, by and large, implicitly assume either that resale possibilities do not exist or that bidders do not take these into account when formulating bids. There are at least two reasons why resale possibilities should be considered explicitly. The first one is positive. If, after the auction is over, bidders see that there are potential gains from trade, then they will naturally engage in such trade. And it seems unlikely that the seller can prevent bidders from engaging in post-auction trade, even if, for some reason, resale was deemed dis-advantageous. In the auction of spectrum licenses in the United Kingdom in 2000, post-auction trade was restricted by the government. The bidders, however, were easily able to circumvent these restrictions. TIW, a Canadian firm, bid successfully for the most valuable license “A ” with a winning bid in excess of £4 billion. Hutchison, a telecommunications company, then acquired the license by buying TIW itself. Similarly, after the auction, France Telecom, an unsuccessful bidder, acquired Orange, a successful bidder. British Telecom created a wholly owned subsidiary that bid successfully in the auction. After the auction, this subsidiary was floated on the stock market and sold. Thus, restrictions on the buying and selling of licenses were circumvented by the buying and selling of companies that owned the licenses. The actions of Hutchison and British Telecom prior to the auction suggest that bidders fully anticipated post-auction resale possibilities. Actually, Hutchison had acquired a small stake in TIW prior to the auction and, in fact, provided funds for its bid. We are grateful to Kenneth Binmore and Tilman Börgers for providing us with details of the UK spectrum auctions