A theory of premium auctions

In premium auctions, sellers stimulate competition by rewarding a number of highest bidders. Previous theoretical investigations considered special cases where premium auctions could be expected to perform well. This paper provides a theory of the English premium auction for the canonical case in which risk averse or risk seeking bidders with symmetric private values compete. We show that for a given number of bidders the expected revenue in the premium auction increases in the bidders' degree of risk tolerance. A surprising result is that the premium auction is more attractive to risk averse bidders. A "zero-expected-utility-for-premium effect" is key to the results. . Keywords: premium auction, English auction, risk averse, risk seeking, pre- mium effect