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01 June 2006
By Dr. Soren Tang Sorensen
When studying equilibrium price paths in sequential auctions of complementary objects, economists often consider models where two identical objects are offered for sale in second price auctions. In these models, bidders have the same valuation for both objects individually, and attach an additional fixed synergy value to the bundle. A common feature of these models is that equilibrium prices are predicted to be declining.
In this article from Economics Letters, NERA Senior Consultant Dr. Soren Tang Sorensen departs from the assumption of identical objects and considers stochastically equivalent objects. In this framework, bidders do not know their valuation of the second object when bidding for the first object, causing bidders to bid more cautiously for the first object and possibly resulting in increasing expected prices.