Using Options with Set Exercise Prices to Reduce Bidder Exposure in Sequential Auctions

This report studies the benefits of using priced options for solving the exposure problem that bidders with valuation synergies face in sequential auctions. We consider a model in which complementary-valued items are auctioned sequentially by different sellers, who have the choice of either selling their good directly or through a priced option, after fixing its exercise price. We analyze this model from a decision-theoretic perspective and we show, for a setting where the competition is formed by local bidders, that using options can increase the expected profit for both buyers and sellers. Furthermore, we derive the equations that provide minimum and maximum bounds of the synergy buyer’s bid in order for both sides to have an incentive to use the options mechanism. Next, we perform an experimental analysis of a market in which multiple synergy buyers are active simultaneously.