Kenneth Hendricks

Empirical Implications Of Equilibrium Bidding In First-Price, Symmetric, Common Value Auctions

This paper studies federal auctions for wildcat leases on the Outer Continental Shelf from 1954 to 1970. These are leases where bidders privately acquire (at some cost) noisy, but equally informative, signals about the amount of oil and gas that may be present. We develop tests of rational and equilibrium bidding in a common values model that are implemented using data on bids and ex post values. We also use data on tract location and ex post values to test the comparative static prediction that bidders may bid less aggressively in common value auctions when they expect more competition. We find that bidders are aware of the “winners curse” and their bidding is largely consistent with equilibrium. Copyright 2003, Wiley-Blackwell.

The Economics of Hubs: The Case of Monopoly

In this paper, we study the optimization problem of an unregulated air carrier which is given the exclusive right to satisfy demand for air travel between any pair of cities. It chooses a network of connections and a set of prices to maximize profits. Thus, both network design and prices are endogenous. We characterize the solution to this optimization problem when demands and costs are symmetric. Our main result is that, if there are economies of density in the number of individuals travelling between two directly connected cities, the optimal network is either a hub of size n − 1 or one in which every pair of cities is connected directly.

Collusion in Auctions

Despite substantial legal evidence of collusion in auctions, there has been very little theoretical or empirical work on this subject by economists. This survey paper discusses mechanisms that are likely to facilitate collusion in auctions, as well as methods of detecting the presence of these schemes. The principal message of this paper is that the presence and the characteristics of collusive mechanisms depend critically on the nature of the object being auctioned, and on the particular auction rules. Accordingly, empirical work should be tailored to specific cases.

A Survey of Recent Empirical Work Concerning Auctions

In this paper, the authors survey some recent empirical work concerning auctions, first outlining two complementary approaches to the empirical analysis of auctions and then discussing several recent developments in the econometric analysis of field data concerning auctions.

Information, Returns, and Bidding Behavior in OCS Auctions: 1954-1969

This paper examines federal auctions for leases on the Outer Continental Shelf in the light of the predictions of the first-price, sealed-bid, common-values model of auctions. The authors find that the data strongly support the model for auctions in which one bidder is better informed than the other bidders. The evidence for auctions in which bidders have noisy, but qualitatively similar, information is less conclusive but is consistent with a model in which each bidder does not know either the actual or potential number of bidders on a lease. Copyright 1987 by Blackwell Publishing Ltd.

Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price

The authors analyze a first-price, sealed bid auction of an object with unknown common value, but one buyer has better information. The reservation price is correlated with the informed buyers assessment of the value and of the probability of rejection. If all random variables are affiliated, the rate of increase in the distribution of the uninformed bid is never greater than that of the informed bid, the distributions are identical above the support of the reservation price, and the informed buyer is more likely to submit low bids. Bids for offshore oil and gas leases on drainage tracts satisfy these restrictions. Copyright 1994 by The Econometric Society.

ENTRY AND EXIT IN HUB-SPOKE NETWORKS

We offer an explanation for why regional carriers may not survive in hub-spoke networks. When a regional carrier and a hub operator compete in a spoke market, both will suffer losses in that market. But if the hub operator exists in the spoke market, its profits in connecting markets will fall. As long as the number of such markets is large enough, it is a dominant strategy for the hub operator not to exit from the spoke market. The regional carrier is then forced to exit, assuming fixed costs are not sunk.

Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration

In this article we examine the effect of private information and information externalties on the ex post efficiency of investment in oil exploration. We show that too much drilling tends to occur if firms believe that the area is likely to contain a sizeable pool of oil, and too little drilling occurs if the opposite is true. Bargaining with well-defined property rights to the information externality can eliminate underinvestment, but overinvestment remains a problem because firms have an incentive not to disclose their private information.

Information and the Skewness of Music Sales

This paper studies the role of product discovery in the demand for recorded music. We show that releasing a new album causes a substantial and permanent increase in sales of the artists old albums—especially if the new release is a hit. Patterns in these “backward spillovers” suggest that they result from consumers discovering the artist upon hearing the new release. To explore the implications of consumers’ incomplete information, we estimate a simple, learning‐based model of market demand. Our results imply that the distribution of sales is substantially more skewed than it would be if consumers were more fully informed.

Equilibria in networks

We study a model in which two carriers choose networks to connect cities and compete for travelling customers. We show that if carriers compete aggressively (e.g., Bertrand-like behavior), one carrier operating a single hub-spoke network is an equilibrium outcome. Competing hub-spoke networks are not an equilibrium outcome, although duopoly equilibria in non-hub networks can exist. If carriers do not compete aggressively, a duopoly equilibrium in hub-spoke networks exists if the number of cities is not small. We provide conditions under which all equilibria consist of hub-spoke networks.