Auctions, aftermarket competition, and risk attitudes

With the experience of the sequence of UMTS auctions held worldwide in mind, we consider a situation where firms participate in license auctions to compete in an aftermarket. It is known that when a monopoly right is auctioned, auctions select the bidder that is least risk-averse. This firm will choose a higher value of the aftermarket strategic variable than any other firm will do, thereby implying a higher market price under price setting behavior and a lower price due to higher quantity under quantity-setting behavior. This paper extends the analysis to oligopoly aftermarkets and analyzes whether the monopoly result carries over to oligopoly settings. We argue that with multiple licenses and demand uncertainty auctions actually perform even worse from a welfare point of view than the monopoly case would suggest. A strategic effect strengthens the monopoly result with respect to prices, but weakens the result with respect to quantities. (C) 2008 Elsevier B.V. All rights reserved.