Auction of public resources and profit

Context:  With the 2020 Nobel Prize in economics awarded to Paul Milgrom and Robert Wilson for their contribution to auction theory, there is a renewed focus on of such auctions to serve common good and not to maximise the revenues.

Type of Auctions

• Open auctions: There are 2 modes in this type

• Ascending mode:  All except one bidder drop out and the winner pays only what he bids to top the second highest bidder

• Descending mode:  The winner pays what the item is worth to him

• Sealed bid auctions: There are 2 modes in this type

• Highest bidder wins at the price he quoted
• Highest bidder wins at the second highest price.

• Simultaneous Multiple Round Auction (SMRA): as the approach devised by Nobel winners.

• Interdependent items are put for simultaneous bidding by eligible bidders and bidding takes place over several rounds and continues  till there are no new bids for any item on offer
• Bidding remains open on all items till the end and there are provisions to prevent bidders from using a wait-and-watch strategy.

Failed Instances of auctions in India

• Failure of SMRA: While India for the first time employed SMRA method during 3G auctions in 2010, the subsequent auction from 2012-2016 were less successful.

• Failure of Sealed bid auction: for resources like oil and gas, the recent auction of coal blocks on the basis of revenue-sharing did not receive sufficient number of bids.

• Failure of open bid auctions: While open bids promote a fair, transparent, unbiased and equitable treatment, it is more focus over revenue maximization rather than serving common good.

Determinants of Auction feasibility

• Should serve the common good: The goal of revenue maximisation should not be attained at the cost of common good.

• Constitutional Provision: Common good is the sole guiding factor and a norm under Art. 39(b) for distribution of natural resources. 
• Define a common good metric: that is measurable and verifiable and relevant for the resource that is to be transferred to private companies or individuals. 

• Alternative to revenue maximizing auctions: must be rules based and have no scope for discretionary decisions, so as to rule out corruption and crony capitalism.

• Can be based on social ends: for e.g. the bidding for auction of urban land could be on the basis of offers of low-cost houses guaranteed by the bidder in return for getting the land at a fixed reserve price.

Conclusion: The auctioning of publicly held resources is welcome as it ensures transparency and reduces the scope for corruption. But auctions must also be designed to serve the common good.