Informational Free Rides in Uniform Price Auctions: Exception or Norm?

Multi-unit common value uniform price auctions with demand function bids are in widespread use. I analyze this auction when there is an informed bidder and other uninformed bidders. In such auctions it is easy to construct equilibria in which uninformed bidders earn a positive payoff by free riding on the informed bidder's information. Here I ask whether such free riding arises only in special cases, and should therefore be considered a pathological exception, or whether it is the norm in equilibrium. To answer this, I derive the necessary and sufficient condition for uninformed bidders to earn a zero payoff in all equilibria. The condition requires that there should be enough demand by uninformed bidders at least at low prices so that no single uninformed bidder is ``pivotal'' in deciding whether total uninformed demand equals or exceeds supply, and places a lower bound on the highest price submitted by the informed bidder (i.e. the highest price at which at least one unit is demanded by the informed bidder). Equilibria not satisfying the condition exist. In these, uninformed bidders appropriate some of the information rent. Further, the condition is quite strong in certain cases, casting doubt on existence of equilibria with zero uninformed payoff. If there is no such equilibrium, informational free riding characterizes all equilibria in uniform price auctions. I discuss application of the results to Treasury auctions as well as repo auctions.