Bidding Wars: Auctions Made License Plate Price Skyrocket in China
As more people in China gained wealth from the rapid economic development and chose to buy cars for either transporting or symbolical purposes, the congestions and pollutions in big cities, especially Beijing, Shanghai, and Guangzhou, became more severe in the recent decade. To tackle this problem, policymakers in those cities came up with the solution of imposing strict quotas on the issuing of new license plates each year. Up until 2018, Beijing adopted the lottery system: obtaining a license plate means involving in a bimonthly draw. The odds of winning fell from 6% in February 2011 to 0.2% in February 2018, hitting the all-time low point. Besides the prevalent lottery system, both Shanghai and Guangzhou also incorporated the auction system. According to the statistics gathered in 2018, around 217,000 bidders battled for 9,855 license plates in one monthly sale in Shanghai, and the average winning bid was 88,176 yuan ($14,022).
The auction system in the license plate market was very similar to what we learned about auctions in class in essence: it’s a more general form of auctions with relaxed constraints. In class, we narrowed our focus to auctions that had only one seller with a single object, while the city would sell many (usually thousands) license plates at each auction. Also, we assumed that several buyers know their own value for the object, but no others’ values, and values were independent and private. However, in this real-world example, auction players, even did not know the specific numbers, could get a good sense of other players’ values by looking at the disclosed data from previous auctions. Among the four types of auctions we covered in class, the auction for license plates could be categorized as “first price sealed bid”: bidders would enter their bids privately through the official city portal and the results would be released at a given time.
During the class discussion, we concluded that it’s never optimal to bid true value in a first price auction. Since players had to pay their bidding prices if they won, they would end in zero payoff, which was the same as they did not win at all. Thus, it would be better for them to bid less than their true values, because they could have some positive payoff if they happened to win the auction. Then the question came to how much should they bid less than their true value. It depends on the number of other bidders, the distribution of values, and their own value. In these license plate auctions, since there were many bidders involved, the theory predicted that they should bid very close to their true value. While whether people acted according to the theory remained in question, one thing for sure was that those auction participants truly valued the license plates for more than ten thousand dollars!
The auction system for license plates was highly debated ever since it was established. On one hand, it successfully avoided some drawbacks of the lottery system. For example, there was much room for corruption in the lottery system. City officials might manipulate the results of the lottery, obtain the license plates illegally, and sell them in the black market for financial gains. This kind of action would be no longer feasible under the auction system. On the other hand, the auction system seemed to favor those who were more well-off and leave those poor people behind. As mentioned earlier, the price of a license plate in an auction could hit $14,022, a number that exceeded the prices of many domestically made cars. While the auction system was not perfect and could not solve the complicated congestion and pollution problem by itself, policymakers in China were also actively seeking other methods to deal with the problem, such as investing in the public transportation system and subsidizing electric or hybrid cars purchase. We would see how these policies work out in the future.
Reference:
https://www.economist.com/china/2018/04/19/why-a-licence-plate-costs-more-than-a-car-in-shanghai