A measure of the variability of revenue in auctions A look at the revenue equivalence theorem.pdfVIP

A MEASURE OF THE VARIABILITY OF REVENUE IN AUCTIONS: A LOOK AT THE REVENUE EQUIVALENCE THEOREM ´ ´ FERNANDO BELTRAN AND NATALIA SANTAMARIA Received 30 August 2005; Revised 6 June 2006; Accepted 7 June 2006 One not-so-intuitive result in auction theory is the revenue equivalence theorem, which states that as long as an auction complies with some conditions, it will on average gener- ate the same revenue to an auctioneer as the revenue generated by any other auction that complies with them. Surprisingly, the conditions are not defined on the payment rules to the bidders but on the fact that the bidders do not bid below a reserve value—set by the auctioneer—the winner is the one with the highest bidding and there is a common equi- librium bidding function used by all bidders. In this paper, we verify such result using extensive simulation of a broad range of auctions and focus on the variability or fluctu- ations of the results around the average. Such fluctuations are observed and measured in two dimensions for each type of auction: as the number of auctions grows and as the number of bidders increases. ´ ´ Copyright © 2006 F. Beltran and N. Santamarıa. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, dis- tribution, and reproduction in any medium, provided the original work is properly cited. 1. Introduction In the early 1980s, a series of papers appeared in the economics literature on auctions, dealing specially with the issue of the expected revenue to an auctioneer in a single- object buyer’s auction. The pioneer work of Vickrey offered the first insights into the expected revenues of four different auctions finding them to be equivalent (Milgrom [4]). The main result, appearing in [6] by Riley and Samuelson, and Myerson [5] be- came known as t