Competing Sellers in Security-Bid Auctions under Risk-Averse Bidders

HDR Candidate: Diego Carrasco

Title: Competing Sellers in Security-Bid Auctions under Risk-Averse Bidders

Time and date: 3pm, Tuesday 2 November 2021

Zoom link: https://uqz.zoom.us/j/89776416535

Abstract:
We analyze a security-bid auction in which two risk-neutral sellers compete for risk-averse bidders by choosing different security designs.  Sellers face a tradeoff in the steepness of the family chosen because steeper securities extract more surplus ex-post but feature lower participation ex-ante. Nonetheless, when bidders are risk-averse, steeper families also provide higher insurance, which makes bidders' entry strategies more complex and bidding more aggressive. In our environment, sellers' and bidders' behaviors are affected by three different channels of competition: the number of bidders, securities' extraction and insurance, and bidders' aggressiveness. We show that when bidders are homogeneously risk averse all equilibria are symmetric, provided a technical local condition. Furthermore, we show that when bidders are heterogeneously risk averse, there is always an equilibrium in which one seller chooses a steeper family to serve the most risk-averse bidders, whereas the other chooses a flatter family to serve the least risk-averse bidders. Such characterization resembles a ``Hotelling location'' model in the steepness spectrum. We show that this result is supported empirically by data from oil-auctions in the US.