Penny Auctions ∗

This paper studies a new form of auctions called penny auctions. In these auctions, strange things happen. Sometimes an auction selling cash generates revenue an order of magnitude higher than amount of cash sold, sometimes an order of magnitude lower. Sometimes the winner of the auction pays an order of magnitude less than many losers losers at the same auction. We will describe stylized facts about these auctions in practice and propose a tractable model that replicates these facts. We show that in this model, the actual outcomes and the revenue for the seller are in general be very volatile and characterize conditions under which the expected revenue takes its maximal value.