Impact of Auction Closing Mechanism on Price Discovery: Evidence from Tea Auctions in India
(A2023-114167)

AUTHORS

Ravikanth Vazrapu, Indian Institute of Management, Bangalore; Sreelata Jonnagaledda, Indian Institute of Management, Bangalore; Mahadevan B, Indian Institute of Management, Bangalore

ABSTRACT

The ending rule is an important aspect of auction design, wherein two common rules are a fixed deadline and an extendable deadline. In a fixed-deadline auction, sniping by experienced bidders is found to limit participant learning, thereby impeding price discovery. Extendable-deadline auctions are found to attract a larger number of bidders, create a better learning opportunity, and thus lead to higher prices. However, they can also increase transaction costs for the participants. We attempt to uncover factors that influence the effect of auction-ending rules on price discovery. We analyze the outcomes of a field experiment conducted by the Tea Board of India, wherein the ending rule was changed from a fixed deadline to an extendable deadline for a short while. Through cluster analysis, we observe that bidding styles are significantly altered during the intervention. Our model will structurally estimate the impact of determinants of compounding costs on reducing prices.