Bounding Best-response Violations in Discriminatory Auctions with Private Values

Deciding whether bidders at auctions are playing a best response is perhaps one of the most fundamental questions faced by empirical workers employing the structural econometric approach. Investigations of this question depend heavily on whether the true valuations of bidders are observed. We develop an approach to bound best-response violations when bidders’ private values are unobserved in multi-unit discriminatory auctions under the assumption of non-increasing marginal valuations. We also derive a bound on the expected profits lost when a best response is not adopted. Subsequently, we implement our framework using data from auctions of Receiver General term deposits conducted by the central bank in Canada, finding that best-response violations are frequent. For most bidders, however, the median lower bound on the economic distance between the estimated best-response and the bid data is small. JEL Classification Numbers: C14, D44, E4, E5, L1.