Auctions with Endogenous Valuations, The Snowball Effect Revisited

In most of the literature on auctions the valuations of agents are exogenously specified. This assumption may be inappropriate in a number of cases where valuations are better derived endogenously. Endogenous valuations are appropriate when there are many units being auctioned and their value is determined in a secondary market which is imperfectly competitive. The model is thus appropriate for studying the sale of quota licenses and scarce resources used in production when product markets are imperfectly competitive. A series of examples are developed to show how these models work. Particular models are developed which cast light on a number of issues in applied micro-economics. These issues include the evolution of market structure, in particular, the "snowball effect", the effect an market structure of selling quota licenses, and the relationship between increasing returns to scale and the monopolization of markets. The models also provide another resolution of the "transponder puzzle".