The linkage principle states that open auctions yield higher expected revenues than sealed-bid auctions by revealing information
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Economic literature partially supports the linkage principle by indicating that correlated beliefs favor open bidding, but other studies and empirical findings show that sealed-bid auctions can yield higher revenues under specific conditions or multidimensional signals.
The first objective of this paper has been to explain why it is that expected seller revenue is the same under very different auction rules. The second objective has been to explain why revenue equivalence no longer holds once the central assumptions of risk aversion and independence of beliefs are modified. The effect of risk aversion is to make a sealed high bid auction more attractive from a seller's viewpoint. The effect of correlated beliefs is to favor open bidding. Which of the two factors dominates under plausible assumptions about risk aversion parameters and about the degree to which beliefs are correlated remains an important open question.
Abstract When national forest timber is sold by sealed bid, prices tend to be higher than in sales by oral auction. This conclusion is derived from analyses of 1977 data from seven Forest Service regions (or zones)–all west of the Mississippi River--where both sales methods were used. The differential was greater for large sales than for small, and greater in regions where timber processors are numerous than where one-bid sales are common. The primary analysis was in terms of overbids, i.e., prices in excess of the Forest Service's appraised values; but comparisons of net and gross stumpage prices yielded the same conclusions. There was no strong indication that dependent mills changed their bidding patterns, or lost their timber supply, when sealed bids were used.
We compare the seller's expected revenue in a second price sealed bid auction for a single object in which bidders receive multidimensional signals. Bidders' valuations for the object depend on their signals and a signal observed privately by the seller. We show in various examples that the seller can be better off not revealing publicly his signal. Hence the linkage principle does not necessarily hold when bidders receive multidimensional signals.
For an important family of asymmetric auctions, we show that the seller's expected revenue is higher in the sealed high-bid auction than in the open auction. This is true for any arbitrary numbers of weak and strong buyers. The family has linear equilibrium bidding strategies, and provides a fertile ground for research in asymmetric auctions. We establish many interesting properties of the linear asymmetric auction model. Revenue comparisons for the two auction formats are performed using data observed in U.S. forest timber auctions. By taking realistic parameters fitting the data, and compare the theoretical predictions of the revenues from the two auction formats, we show that the revenue difference is minimal with a fixed number of participants. When the difference in participation is taken into account, the revenue difference predicted by the linear model is quite similar to the empirical results of Athey, Levin and Seira (2004).
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