How are prices determined in auction markets?

Published: by Norges Sildesalgslag
Tor Hugo Hauge held a trial lecture on a prescribed topic, and defended his doctoral thesis as a final requirement of the PhD programme at NHH friday 5th of February. Auctions as a sales mechanism is modelled by use of game theory. Several auction formats are in use. The different formats may produce different market clearing prices.

Some formats may give rise to inefficient allocations, i.e., that the object does not go to the bidder with the highest valuation.

In the thesis, both theoretical and empirical questions are addressed. Empirically, a particular auction market, the sales of pelagic fish catches by Norges Sildesalgslag, is analysed.

The auction is characterized by several catches being sold simultaneously, bidders submit sealed bids, and winning bidders pay a price equal to their bids. In addition, bidders may give priorities to their different bids and set quantity limits that come into effect if a bidder wins more catches than he can handle in the short term.

One topic concerns how prices are determined in the market. The effect of specific explanatory variables, like the number of bidders, on the market price, is analysed. A distinction is made between product-specific and market-specific variables. Elasticities for the most important explanatory variables are computed.

The rules of the auction specify that bidders are allowed to set quantity limits and give priorities to their bids. It is shown that the possibility of giving priorities to bids, a novel feature in the literature, may reduce total expected revenue and lead to inefficiencies.

The empirical analysis, however, reveals that other effects counter this possibility. Thus, the auction format seems to work well in practice.

Prescribed topic for the trial lecture: "An Assessment of the Norwegian Fish Auctions: Can the Auction design be improved?"

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