How Smart Bidders Can Manipulate Massive Auctions
This article studies the combinatorial clock auction format such as the spectrum auction conducted by the Federal Communications Commission where assets of different types are bought or sold simultaneously. This format involves an initial multi-round stage of bidders publicly declaring their interest in the assets at different price points, followed by a second round of sealed bids. Researchers from Stanford Graduate School of Business noticed a trend in the auctions where one bidder would sometimes pay less than competitors, despite winning similar or more amounts of the item. They found that the combinatorial clock auction could be manipulated when bidders bid more aggressively or less aggressively, resulting in an inefficient allocation of items and prices. Since the combinatorial clock auction is a second-price auction, we know from class that the dominant strategy is for a bidder to bid their true value of the items.
However, strategic difficulties arise when in a multi-round auction, bidders can observe the behavior of their competitors and infer something about their final bids. Predatory bidders who have no interest in winning the item can then artificially drive up demand for the item in hopes that increased bidding activity will cause their competitors to pay more. On the other hand, bidders may in return alter their auction strategy knowing that competitors will try to affect prices by not bidding their true value, further affecting the auction’s equilibrium. The article suggests that the combinatorial clock auction could be the best available option, but may benefit from a better format for specific auctions.
https://www.gsb.stanford.edu/insights/how-smart-bidders-can-manipulate-massive-auctions