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A Complete Characterization of Pure Strategy Equilibria in Uniform Price IPO Auctions: Experimental Evidence

Ping Zhang

30.06.2007

Rome, ESA 2007 International Meeting

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Initial Public Offerings

Firms raise money from a primary stock market by selling new stocks.

These new shares for sale to the public are known as Initial Public Offerings.

IPO

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Investors submit demand schedules

p

p*

all bidders

Investors obtain quantities demanded at p* at a price of p*

bidder i S

Uniform Price Auction

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Tacit collusion equilibrium: Collusive strategies lead to a low market priceWilson (1979), Back and Zender (1993), Biais and Faugeron (2002), Ausubel and Cramton (2002)

A collusive equilibrium only exists in continuous demand functions; does not survive with finite number of bids Harbord, Fabra and von der Fehr (2002) Kremer and Nyborg (2004)

Advantage of increased competition Friedman, 1961, 1990

Previous Theory

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The market value vn increases with the number of high signals

n; risk neutral.

By Biais and Faugeron (2002)

S shares

uninformed investors

N informed investors

Signals: High, 1- Low

No signalcan buy up to S(1-k), k∈[0,1]

Model

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Price,Value

v4

v3

v2

v1

v0

1/4 1/3 1/2 1 Quantity

Characterization of Equilibria

Bidders bid more aggressively when having higher expected value; price increases with value

Price can be any between 0 and the realized market value

The tacit collusion is only an extreme case of the set of equilibria

Different type investors can be involved in the set of equilibria: EH, EHL, EHU, EHLU. EH : H investors absorb all the shares, U and L investors only bid between 0 and v0

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Experimental Design

100,000 shares to be sold to 4 investors

3 informed investors: observe High signal or Low signal with equal chance

1 uninformed investor: no signal

Market value = 1 + # of HIGH signals

14 groups

20 rounds per session; average earnings: 16.92 pounds (1.18- 45.34)

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Experimental Design

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Results

Result 1: In the Uniform Price Auction H bidders bid more aggressively than L and U bidders

0

1

2

3

4

5

6

0 15000 30000 45000 60000 75000 90000

Units

Pri

ce

InformHigh

InformLow

Uninform

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Result 2: In the uniform price auction H investors receive higher allocations on average.

0

80000

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Market

Un

its

H bidder

L bidder

Uniformed

Results

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Result 3: In the uniform price auction the market price increases with the market value.

0

1

2

3

4

5

6

0 1 2 3 4 5 6

Val ue

Price

Results

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In TCE :

bids are independent of signals allocations are independent of signalsmarket price is independent of market value

Results 1-3 are inconsistent with Tacit Collusion Equilibria.

Results

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• Behaviour in uniform price auctions not consistent with Tacit Collusion equilibrium

• In the uniform price auction, bidders with higher expected market value bid more aggressively, price increases with value

• Behaviour in the experiment support the properties of the new set of equilibria

• The TCE of the uniform price auction should not be over emphasized in revenue comparison among IPO mechanisms

Conclusions

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Thank you !