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Speculation in Second-Price Auctions with Resale

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Speculation in Second-Price Auctions with Resale Rod Garratt and Thomas Tro¨ger∗ April 28, 2003 Abstract This paper contributes to the literature on second-price auctions with resale. We add speculators—bidders with value zero—to the standard symmetric independent private values environment. There always exists a continuum of inefficient equilibria that are profitable for a speculator. With no reserve price in the initial auction, specu- lation can enhance the initial seller’s expected revenue. On the other hand, speculation can harm the initial seller even if she commits to an optimal reserve price. Our results are valid for English auctions as well. KEYWORDS: second-price auction, speculation, resale 1 Introduction There is abounding evidence of resale following auctions. Even in markets where resale is expressly forbidden, it is common practice.1 Despite all this, relatively little is known about the theoretical properties of auctions with resale. Meanwhile, standard auction formats continue to be used without a full understanding of the implications of resale opportunities. ∗Both Department of Economics, University of California, Santa Barbara, CA 93106- 9210, U.S.A.. We are grateful to Ted Bergstrom, Ken Binmore, Matthew Jackson, Alexan- der Koch, Steve LeRoy, Benny Moldovanu, Georg No¨ldeke, Thomas Palfrey, Hugo Son- nenschein, Ennio Stacchetti, John Wooders, and Bill Zame for helpful comments. 1Spectrum is allocated by auction in many countries. Some impose “use-it-or-lose-it” conditions designed to prevent resale. However, these restrictions are easy to circumvent and there are reported instances where “shell” companies were formed for the purpose of acquiring spectrum licences and then sold. 1 Opportunities for resale change the auction environment in numerous ways. The explicit recognition of multiple periods allows for the possibility of information arrivals and changes in the bidder population that affect how the initial seller and buyers should behave. Moreo

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