On the role of discrete bid levels in oral auctions

Bids in oral auctions are restricted to discrete levels. This paper both examines the choice of levels at which bids will be allowed and also presents a simple model of the role of the discrete levels in bidding strategy. We consider two different distributions of bidders' values, identifying cases in which revenue is maximized by increasing intervals, by constant intervals, and by decreasing intervals. Moreover, conditions under which the choice of bid levels that maximizes bid taker revenue also maximizes economic efficiency are developed. We present a model of the economic trade-off between auction duration and step size. We consider the previously undiscussed issue of when economically motivated bidders should skip bid levels and when they should merely make minimum advances, and develop a model in which it is equilibrium behavior always to make the minimum allowed advance.