Auctions



In 1999, Germany sold some mobile-phone spectrum by auction, with one rule specifying that any new bid had to exceed the previous high bid by 10 percent. Two serious bidders were involved.

One company bid 18.18 million marks on blocks 1 to 5 and 20 million on blocks 6 to 10. Why the difference? Note that 18.18 million plus 10 percent is just about 20 million. The first company was sending the second a message: ”We think 20 million is the right price: let’s not compete to push it up.” The signaling strategy worked: the auction ended after two rounds, and each bidder got half the blocks at the same low price.