Hybrid Auctions I: Theory

Abstract

In this paper we examine the properties of a hybrid auction that combines a sealed bid and an ascending auction. In this auction, each bidder submits a sealed bid. Once the highest bid is known, the bidder who submitted it is declared the winner if her bid is higher than the second highest by more than a predetermined amount or percentage. If at least one more bidder submitted a bid sufficiently close to the highest bid (that is, if the difference between this bid and the highest bid is smaller than the predetermined amount or percentage) the qualified buyers compete in an open ascending auction that has the highest bid of the first stage as the reserve price. Qualified bidders include not only the highest bidder in the first stage but also those who bid close enough to her. We show that this auction generates more revenue than a standard auction. Although this hybrid auction does not generate as much revenue as the optimal auction, it is ex-post efficient.