Not knowing the competition: evidence and implications for auction design

Abstract

In a government auction program where first‐price auctions generate significantly higher revenue than English auctions, I document evidence that bidders are uncertain about the number of auction entrants. Motivated by additional data evidence, I estimate a structural model of auctions in which rivals' participation is stochastic, allowing for bidders' risk aversion and asymmetry. Counterfactual simulations reveal that bidders' uncertainty about the number of entrants, combined with risk aversion, substantially softens the revenue impact of low competition in first‐price auctions. This explains the observed revenue patterns and uncovers an empirically important reason for sellers to favor first‐price auctions over English auctions.