Auction of Licenses to a Technology: What does the Experimental Evidence Say? 

Aniruddha Bagchi, Mike Shor

Abstract:

We employ laboratory methods to test a model of bidding in an auction with externalities in which a firm can bid for one license for a cost-reducing technology. Since the winners impose a negative externality on the losers, bids must account for both the value of winning and the negative value of losing. Experimental treatments differ in terms of the severity of the negative externality (based on the substitutability of competitors' products), and the number of licenses being auctioned. We find that subjects underbid relative to theoretical benchmarks for auctions of one license, but overbid when two licenses are auctioned. In terms of mean revenues, the experimental revenues are consistent with the predicted revenues. However, there are some differences in the distribution of the experimental revenues and the predicted revenues and we propose a possible explanation rooted in a simple bidding heuristic for the difference.