What Really Matters in Auction Design

A uctions have become enormously popular in recent years. Governments are now especially keen, using auctions to sell mobile-phone licenses, operate decentralized electricity markets, privatize companies and for many other purposes. The growth of e-commerce has led to many business-tobusiness auctions for goods whose trade was previously negotiated bilaterally. Economists are proud of their role in pushing for auctions; for example, Coase (1959) was among the Ž rst to advocate auctioning the radio spectrum. But many auctions—including some designed with the help of leading academic economists—have worked very badly. For example, six European countries auctioned off spectrum licenses for “third-generation” mobile phones in 2000. In Germany and the United Kingdom, the spectrum sold for over 600 euros per person ($80 billion in all, or over 2 percent of GDP). But in Austria, the Netherlands, Italy and Switzerland, the revenues were just 100, 170, 240 and 20 euros per person, respectively. To be sure, investors became more skeptical about the underlying value of the spectrum during 2000 (and they are evenmore skeptical today). But this is just a fraction of the story. The Netherlands auction was sandwiched between the U.K. and German auctions, and analysts and government ofŽ cials predicted revenues in excess of 400 euros per person from the Italian and Swiss auctions just a few days before they began (Michelson, 2000; Roberts, 2000; Total Telecom, 2000; Klemperer, 2002). These other auctions were Ž ascoes primarily because they were poorly designed. So what makes a successful auction? What really matters in auction design are the same issues that any industry