On a Possible Benefit to Bid Takers from Using Multi-Stage Auctions

Each year, multi-stage auctions of one form or another sell or let billions of dollars worth of goods and contracts. Yet despite the significance of such auctions, the existing theory of auctions and competitive bidding fails to explain why a bid taker might prefer a multi-stage auction to a, possibly simpler, single-stage mechanism. In fact, the existing theory tends to overlook multi-stage mechanisms altogether. This paper takes a first step in correcting that omission. We start with several illustrations of what we will define to be multi-stage auctions. All the illustrated auctions allow bidders to acquire information---or, more generally, to increase the amount of resources committed to bidding---in stages. We conjecture that allowing such a sequential commitment of resources could result in a more efficient auction than if bidders had no chance to adjust their commitments. An analytic example illustrates and documents the benefits to the bid taker from using a multi-stage auction. In the example, bidders acquire costly information in stages; a bidder may stop acquiring additional information as soon as further participation in the auction would no longer increase his expected net profit. The resulting auction generates significantly more expected revenue for the bid taker than if the bidders all had to acquire the same amount of information.