Hierarchical package bidding: A paper & pencil combinatorial auction

We introduce a new combinatorial auction format based on a simple, transparent pricing mechanism tailored for the hierarchical package structure proposed by Rothkopf, Pekeč, and Harstad (1998) to avoid computational complexity. This combination provides the feedback necessary for bidders in multi-round auctions to discern winning bidding strategies for subsequent rounds and to coordinate responses to aggressive package bids. The resulting mechanism is compared to two leading alternatives in a series of laboratory experiments involving varying degrees of value synergies. Based on these “wind tunnel” tests the FCC has decided to use hierarchical package bidding in the major upcoming 700MHz auction. JEL codes: D44, C92