The Ascending Auction Paradox

Abstract

We examine uniform-price, multiple-unit auctions that are dynamic rather than sealedbid, auctions where the price ascends, giving bidders the chance to observe and respond to the bidding. In this dynamic setting, subgame perfection can be exploited to refine the set of equilibria. Restricting attention to ascending auctions where two bidders with complete and perfect information alternate placing bids until the market clears, we show that in the unique equilibrium each bidder reduces her quantity to the market-clearing level at her first opportunity, when the price has not yet risen. For much the same reason that Rubinstein bargainers choose to trade immediately even though they could alternate making offers indefinitely, a bidder in an ascending auction calculates where the auction would go, and then uses backward induction to find an offer that is acceptable to her rival at the start of the auction.