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Uniform-price Auction verses Discriminatory Auction

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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?

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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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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 ...

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