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Uniform-price Auction verses Discriminatory Auction

1. Could you explain the difference between a uniform-price auction and a discriminatory auction?
2. And, why might you prefer to sell securities by one method rather than another?
3. Could you please elaborate on both questions?

Solution Preview

Please see file response attached (also presented below), as well as two highly relevant articles. I hope this helps and take care.

RESPONSE:

1. Could you explain the difference between Uniform-price auction and a discriminatory auction?

Under the discriminatory auction "What you bid is what you pay for." The bigger the uncertainty of the auction cut-off price, the less willing you become to bid, so called "bid shaping." Bid shaping is more severe as the uncertainty in the cut-off increases. On the one hand, in the Korean treasury auction market, for example, the lack of the so-called "when issued market" delays the price discovery, and on the other hand, it precludes the possibility "short squeeze" (http://repec.org/esFEAM04/up.21578.1079400692.pdf).

Depending on whether the uncertainty is large or not, auction revenue criterion favors either a switch to the uniform-price auction or the continuation of the discriminatory auction, at least from the bidders point of ...

Solution Summary

This solution explains the difference between a uniform-price auction and a discriminatory auction, and why you might prefer to sell securities by one method rather than another. Supplemented with two supporting articles.

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