Charles R. Schnitzlein

Competition and Cooperation in Divisible Good Auctions: An Experimental Examination

An experimental approach is used to examine the performance of three different multi-unit auction designs: discriminatory, uniform-price with fixed supply, and uniform-price with endogenous supply. We find that the strategies of the individual bidders and the aggregate demand curves are inconsistent with theoretically identified equilibrium strategies. The discriminatory auction is found to be more susceptible to collusion than are the uniform-price auctions, and so contrary to theoretical predictions and previous experimental results, the discriminatory auction provides the lowest average revenue. Consistent with theoretical predictions, bidder demands are more elastic with reducible supply or discriminatory pricing than in the uniform-price auction with fixed supply. Despite a lack of a priori differences across bidders, the discriminatory auction results in significantly more symmetric allocations.

Stock Market Quality in the Presence of a Traded Option

We use a controlled economic experiment to examine the implications of asymmetric information for informational linkages between a stock market and a traded call option on that stock. The setting is based on the Kyle model and Back (1993). We find that an insider trades aggressively in both the stock and the option, and that this leads to important feedback effects between the two markets: price discovery in the stock market also occurs in the option market and vice versa. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock, and volatility is lower. We argue that this provides new insights into how the introduction of a traded option improves the market quality of the underlying asset.

When Less (Potential Demand) Is More (Revenue): Asymmetric Bidding Capacities in Divisible Good Auctions

We show that asymmetry in bidders’ capacity constraints plays an important role in inhibiting collusion and promoting competitive outcomes in multi-unit auctions in which the final value of the good is common knowledge. This effect appears to be related to the increased difficulty of coordination when there are significant differences between bidders. Due to its impact on collusive outcomes, asymmetry in bidding capacities has a more powerful impact on the seller’s revenue than does the auction type. Consistent with the finding in Sade, Schnitzlein, and Zender (2006) that the discriminatory auction is more susceptible to collusion than the uniform-price auction, asymmetry in capacity constraints has a greater impact in discriminatory auctions.

Divisible Good Auctions with Asymmetric Information: An Experimental Examination

An experimental approach is used to compare bidding behavior and auction performance in uniform-price and discriminatory auctions when there is incomplete information concerning the common value of the auctioned good. In a symmetric information environment, the different auction formats provide the same average revenue. However, when information is asymmetric the discriminatory auction results in higher average revenue than the uniform-price auction. The volatility of revenue is higher in the uniform-price auctions in all treatments. The results, therefore, provide support for the use of the discriminatory format. Subject characteristics and measures of experience in recent auctions are found to be useful in explaining bidding behavior.

Microstructure with multiple assets: An experimental investigation into direct and indirect dealer competition

Abstract This paper uses the economic laboratory to isolate the effects of direct and indirect competition on dealer profitability. We compare these two settings: (1) three competing dealers in a single asset (direct competition) with (2) three assets with a monopoly dealer in each (indirect competition). We find that: bid–ask spreads are wider, prices are less responsive to order flow (so there is less price discovery), and per-trade dealer profits are larger in the single-asset setting. Important economic differences between these two settings include a heightened adverse selection problem in the three-asset setting and a public good nature of price discovery in the one-asset setting.

On the Persistence of Overconfidence: Evidence from Multi-Unit Auctions

We analyze pre and post-task confidence in an experiment in which subjects bid in multi-unit common value auctions. Subjects return for a second session, so we are able to assess how performance affects the evolution of confidence. Those with low confidence prior to the first session underestimate performance while those with high confidence overestimate performance. Although the change in pre-experiment confidence from session one to session two is close to zero, the dispersion in confidence increases. For those with moderate initial confidence, the change in confidence depends significantly on performance in session one. For those with high initial confidence, the change in confidence does not depend on performance, and the correlation between confidence prior to session two and confidence prior to session one is significantly higher than for those with neutral or low confidence. Subjects with high initial confidence also base their perception of post-experiment relative performance primarily on pre-experiment confidence: an effect not present in the moderate and low confidence groups. Based on a pre-experiment survey, we also find that those with high initial confidence are more likely to have prior experience trading stocks or options.

Come on in, the Water's Fine! An Experimental Examination of Hybrid IPO Auctions with a Public Pool

We offer experimental and theoretical evidence that the auction method for initial public offerings (IPOs) may be improved through the use of hybrid auctions with separate retail tranches or ‘public pools’. Such hybrids, which combine a price-setting tranche (an auction or book building) with a separate tranche that allows investors to place orders without specifying a price (the public pool), have been used for IPOs around the world. We develop theory, then run laboratory experiments to examine the effects of a public pool on multi-unit uniform price auction IPOs. Our experimental auction design incorporates key features of the IPO process such as endogenous bidder entry, costly information acquisition, differing capacity constraints and uncertainty with respect to the intrinsic value. Simulations are used to characterize the Symmetric Bayesian Nash Equilibria (SBNE) for both pure and hybrid auctions in a model that is calibrated to key parameters from our experimental data, generating predictions for the remaining variables. As predicted, a public pool tranche improves auction performance by increasing proceeds, lowering price volatility, reducing price error and reducing the incentive for small bidders to free ride by submitting extremely high bids. Underpricing occurs in both treatments but is less severe with the public pool. We also show that in collusive-seeming multi-unit auction equilibria, it may be optimal for informed, rational bidders to place clinching bids strictly above the expected value per unit, leading to very steep demand curves. Overall, our results imply that both IPO auctions and crowdfunding may be improved by restricting retail investors to a separate, non-price-setting tranche.Abstract. We offer experimental and theoretical evidence that the auction method for initial public offerings (IPOs) may be improved through the use of hybrid auctions with separate retail tranches or ‘public pools’. Such hybrids, which combine a price-setting tranche (an auction or book building) with a separate tranche that allows investors to place orders without specifying a price (the public pool), have been used for IPOs around the world. We develop theory, then run laboratory experiments to examine the effects of a public pool on multi-unit uniform price auction IPOs. Our experimental auction design incorporates key features of the IPO process such as endogenous bidder entry, costly information acquisition, differing capacity constraints and uncertainty with respect to the intrinsic value. Simulations are used to characterize the Symmetric Bayesian Nash Equilibria (SBNE) for both pure and hybrid auctions in a model that is calibrated to key parameters from our experimental data, generating predictions for the remaining variables. As predicted, a public pool tranche improves auction performance by increasing proceeds, lowering price volatility, reducing price error and reducing the incentive for small bidders to free ride by submitting extremely high bids. Underpricing occurs in both treatments but is less severe with the public pool. We also show that in collusive-seeming multiunit auction equilibria, it may be optimal for informed, rational bidders to place clinching bids strictly above the expected value per unit, leading to very steep demand curves. Overall, our results imply that both IPO auctions and crowdfunding may be improved by restricting retail investors to a separate, non-price-setting tranche.