Allocative Externalities in Auctions

In this paper, the first price sealed bid auction, second price sealed bid auction and Vickrey auction are compared in terms of efficiency and revenue in presence of heterogeneous allocative externalities. The results show that the smaller the number of participating firms, the better the standard sealed bid auctions perform in terms of efficiency. When the size of the externalities compared to the firms’ payoffs of winning themselves decrease, standard sealed bid auctions are also more efficient. Revenue of the standard sealed bid auctions is generally higher than that of the Vickrey auction for a low number of participating firms. However, if externalities are strongly heterogeneous, the Vickrey auction may yield higher revenue. Moreover, the Vickrey auction’s revenue increases in the number of participating firms more rapidly than that of the standard sealed bid auctions. The paper also shows how a market model underlying the auction may influence the auctions’ outcomes and is thus an important consideration in evaluating auctions.