Francesco Decarolis, the Unexpected Side of AuctionsTHE NEW ASSOCIATE PROFESSOR RESEARCHES AUCTION MECHANISMS IN ORDER TO PREVENT COLLUSION IN PUBLIC PROCUREMENT, HEALTHCARE AND IN ONLINE AD PURCHASING
Auctions are everywhere. They regulate the invitations to tender for the renovation of existing roads, the sale of licenses to transmit over a specific spectrum band, power purchase agreements, the allocation of online advertising spaces. Francesco Decarolis studied auction markets in Chicago. After graduating at Bocconi University, where he returned as Associate Professor in November 2017, he studied the subject with Roger Myerson, one of the winners of the 2007 Nobel Prize in Economic Sciences. Decarolis is also the recipient of an ERC Starting Grant for his research project on corruption in public procurement. “There is a close relation between data and theory in auction markets”, he says. “This area of economics gives us the chance to provide accurate answers to important questions”.
The problem with average bid auction
Professor Decarolis was in Chicago when he first came across the design of the Italian public procurement auctions. “It left me speechless. It was, to say the least, least bizarre”. The sealed bid auctions were designed to reward the bidder closest to a function of the average. “The rationale behind them was understandable: the lowest bidder may not be reliable and a low price in the auction stage might come at the cost of a poor performance. But the solution to the problem was… perverse”. In an average bid auction, firms tend to change their behavior. They stop competing on price and they bid prices that do not bear any clear connection to the underlying costs. There is more: firms multiply bids in order to manipulate the average discount. “I have built the first dataset of Italian public procurement auctions and I have investigated the emergence of collusion in average bid auctions and the impact of this auction design on the efficiency of the allocation”. His studies led him to collaborate with the Italian Antitrust authority in order to identify collusion cases in auctions.
The health care price
Medicare Part D: Are Insurers Gaming the Low Income Subsidy Design?, published in 2015 in the American Economic Review, was inspired by the distortions of the Italian average bid auctions. It focuses on health care in the United States and in particular on the competition between insurers in the market for Medicare private plans. The “Part D” in the title refers to the federal program that subsidizes the costs of prescription drugs for Medicare members aged at least 65. The government does not negotiate prices with pharmaceutical firms, it rather puts private insurers in competition. Public insurance is delivered through a choice-based private insurance market where subsidized beneficiaries can choose between insurance plans. “The question is: how do you set subsidies? At first, the federal government asked insurers for their prices and set the subsidies on an average. As in the Italian case, insurers were able to determine the level of subsidy by offering more than one plan. This can explain a 30% premium growth observed in the first six years of the program”. Professor Decarolis presented the study at the Congressional Budget Office, the federal agency that provides nonpartisan economic analysis to the Congress, and in many other academic and policy assemblies, thus contributing to the reform that has taken place in the following years.
The auction goes online
Another strand of research is dedicated to online ad auctions. A large share of search engines’ revenues come from advertising. Until some time ago, the results highlighted by Yahoo!, the so-called sponsored links, were winners of an auction in the order in which they appeared in the search engine: the top slot is given to the firm that placed the highest bid, the second to the second-highest bidder and so on. “This auction mechanism called Generalized First Prize (GFP) has proved to be unstable. Firms kept on bidding, thus trying to maintain their position while paying less and then they raised their bids in order to outperform the competitor that occupied the contiguous position. When the cycles of aggressive and conservative bidding stopped, it settled on low prices. Yahoo! has called it implicit collusion”.
Google therefore introduced the Generalized Second-Prize auction (GSP) where the highest bidder pays the price bid by the second-highest bidder, the second-highest pays the price bid by the third-highest, and so on. This mechanism removes the incentive to change the price as it determines the position, but not the price paid. “The market has changed dramatically in recent years. With the explosion in the number of platforms, firms have begun to delegate bidding to specialized marketing agencies. In Marketing Agencies and Collusive Bidding in Online Ad Auctions, we show that the presence of those agencies undermines the revenues and the allocative efficiency in GPS auctions. We propose a different mechanism called Vickerey-Clarke-Groves (VCG) that limits the damage done by the marketing agencies’ coordinated behavior. This also provide a rationale for why Facebook took an alternative route and adopted the VCG”.
Find out more
Francesco Decarolis, Comparing Procurement Auctions, International Economic Review, forthcoming.
Francesco Decarolis, Timothy Conley, Detecting Bidders Groups in Collusive Auctions, in American Economic Journal: Microeconomics Vol. 8, No. 2, 2016.
Francesco Decarolis, Medicare Part D: Are Insurers Gaming the Low Income Subsidy Design?, in American Economic Review, 2015.
Francesco Decarolis, Maris Goldmanis, Antonio Penta, Marketing Agencies and Collusive Bidding in Online Ad Auctions, working paper.
by Claudio Todesco