vickrey1961

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COUNTERSPECULATION, AUCTIONS, AND

COMPETITIVE SEALED TENDERS

WILLIAM VICKREY

Columbia University

In His Economics of Control, A. P. Lerner threw out an interesting

suggestion that where markets are imperfectly competitive, a state

agency, through "counterspeculation," might be able to create the

conditions whereby the marginal conditions for efficient resource

allocation could be maintained. Unfortunately, it was not made clear

just how this counterspeculation was to be carried out, and to many

this term denotes just one more of the empty boxes that rattle

around in the economist's cupboard of ideas. And there appears to

have been, in the years since Economics of Control first appeared,

no attempt to examine critically just what this intriguingly labeled

box might in fact contain

In Section I this counterspeculation box will be further examined;

it turns out that most of the devices that most immediately suggest

themselves under this heading prove to be inordinately expensive irn

terms of their demands on the fiscal resources of the state relative to

the net benefits to be realized, at least where the commodity in ques-

tion is finely divisible. The other extreme case, where there is only a

single indivisible item to be allocated, is examined in Section II; in

this case the possibilities for reaching an optimum solution in a mar-

ket with a limited number of participants become considerably

brighter: the common or progressive type of auction can be shown

to provide better chances for optimal allocation than the regressive

or "Dutch" auction. The implications of these findings for the more

significant cases where contracts are let or sales made by competitive

bids or tenders are examined in Section III; the analysis reveals a

likelihood that certain modifications of current practices in these

areas, more specifically by making the award price equal to the

second highest (or lowest) bid price rather than the highest bid

price, might prove generally beneficial in improving the allocation of

resources without being as prejudicial to the interests of sellers (or

buyers) as might at first seem to be the case. Section IV deals with

the somewhat more complicated and general class of cases where

there are several identical items to be auctioned, and Section V deals

with the application of the concepts derived in Section IV to the sale