Sequential Auctions with Synergies: The Paradox of Positive Synergies.

In multi-unit (procurement) auctions winning multiple contracts can lead to cost advantages due to synergies. As an example one can think of procurement auctions where construction firms have returns to scale for investments in specialized equipments and workers that are required in large-scale projects. In this paper we analyze the effects of the presence of such synergies on bidding behavior and thus auction outcomes in general. We find that the presence of synergies on the bidders’ side induces more competitive bidding and therefore leads to lower expected payoffs for bidders and higher expected revenues for sellers. Thus, instead of benefiting from the presence of synergies, bidders suffer from it. Moreover it is found that serious bankruptcy problems can occur. In particular the negative welfare consequences caused by these bankruptcy problems are of major importance for auction design when synergies are present. Finally, the presence of synergies leads to a decreasing price trend and can therefore explain the declining price anomaly.