On the informational inefficiency of discriminatory price auctions

We analyze bidding behavior in large discriminatory-price auctions in a common value setting where the number of objects is a non-trivial proportion of the number of bidders. We show that the average price paid in the auction is biased downward from the expected value of the objects, even in the competitive limit. We show that conditional on a signal that falls below a threshold, a bidder bids nor more than the expected value of an object conditional on the signal and winning; while conditional on any signal that lies above the threshold the bid is strictly lower than the expected value conditional on the signal and winning. Keywords: Auction, Competition, Discriminatory Auction, Asymptotic E¢ ciency, E¢ cient Markets, E¢ cient Market Hypothesis. JEL Classi…cation Numbers: D44, C72, D41, G14 We are grateful for …nancial support from the National Science Foundation under grant SES-9986190 and SES-0316493. We thank an associate editor and referee for helpful suggestions, and Phil Reny for pointing out a signi…cant error in an earlier version. yDivision of Humanities and Social Sciences 228-77, California Institute of Technology, Pasadena, California 91125, USA. Email: [email protected] zGraduate School of Business, Stanford University, Stanford CA 94305, USA. Email: [email protected]