The re-auction of the Bundesliga broadcasting rights has brought forward a unique case in the world of auction theory. What would traditionally involve bidders withholding their maximum willingness to pay has now transformed into a scenario where both bidders—DAZN and Sky—have gained critical information about their competitor’s initial bid. This newly transparent situation introduces complex strategic choices. DAZN could lower its bid, knowing it outbid Sky in the first round, while Sky must raise its offer but carefully, as DAZN might also adjust downward. Meanwhile, the German Football League (DFL) faces the challenge of designing an optimal auction format, maximising revenue while navigating the competitive dynamics between the bidders. This interplay of strategies makes the re-auction a compelling illustration of game theory in action.
The Bundesliga Rights Bidding: Sky, DAZN, and the Path to Re-Auction
The legal battle between DAZN and the DFL began after DAZN lost the bid for Package B, despite offering a reported €1.6 billion, 20% higher than Sky’s bid. Sky had bid around €1.3 billion for the package, which includes 196 matches per season, featuring key Friday and Saturday games. DAZN’s higher offer was rejected due to administrative issues involving a bank guarantee, despite previous auctions accepting a letter of responsibility. Following DAZN’s legal challenge, a tribunal ruled in their favour, forcing the DFL to restart the auction. This creates a rare scenario where both DAZN and Sky now know each other’s bids, reducing the traditional uncertainty inherent in auction theory. This newfound transparency significantly alters the strategic landscape for both bidders.
Auction Theory: When Private Information Becomes Public
In typical auctions, each bidder holds private information about their maximum willingness to pay. This drives strategy, with each bidder forming beliefs about how much their competitor might value the asset. However, in this case, the bidders’ private information has become much less private, as both parties know what the other was willing to pay in the first round. This fundamental shift requires each bidder to reassess their strategy based on the newfound transparency.
DAZN’s Strategic Trade-offs
DAZN knows it outbid Sky significantly in the first round, which creates a strategic trade-off for the second round:
- Bid Lower to Save Costs
DAZN could reduce its bid, believing Sky will be reluctant to bid much higher than their initial offer. This would allow DAZN to secure the rights while saving money. However, DAZN risks underestimating how much Sky might raise its bid, potentially losing the rights. - Maintain the Aggressive Bid
DAZN could keep its high bid from the first round to ensure it wins, eliminating any uncertainty. The downside is that DAZN might end up paying more than necessary, particularly if Sky doesn’t significantly raise its bid. DAZN’s strategy hinges on balancing the desire to save money against the risk of losing to a more aggressive bid from Sky.
Sky’s Strategic Trade-offs
Sky, knowing it was outbid by a substantial margin in the first auction, must now reconsider its approach:
- Moderate Increase
Sky could raise its bid modestly, assuming DAZN might reduce its own bid. This strategy could allow Sky to win at a lower price than initially expected. However, the risk is that DAZN may keep its aggressive bid, and Sky would still lose despite raising its offer. - Significant Bid Increase
Sky could go all-in, significantly increasing its bid to outcompete DAZN. This approach is riskier financially, especially if DAZN drops its bid, resulting in Sky overpaying. Sky’s challenge lies in balancing how much to increase its bid without overspending, knowing that DAZN may adjust its strategy.
Strategic Interaction: Bids Moving Closer
As both DAZN and Sky are aware of each other’s first-round bids, the second-round bids will likely move closer together. DAZN, expecting Sky to raise its bid, may lower its own offer slightly, while Sky, knowing it underbid previously, will likely increase its offer. This dynamic is expected to narrow the gap between their bids, with each bidder trying to anticipate the other’s next move.
Another Dimension: Common Values
An additional layer to consider is common values. The value of the broadcasting rights may not be entirely private. DAZN’s high bid could signal to Sky that DAZN knows something about the market’s true value that Sky had not fully anticipated. Similarly, Sky’s original low bid might indicate that Sky undervalued the package. This could lead to both companies revising their bids in the re-auction, possibly bringing them even closer together as they re-evaluate the overall market potential.
The Auction Format: First-Price vs. English Auction
The auction format will play a pivotal role in shaping the outcome:
- First-Price Auction
In a first-price auction, which was used in the initial round, both bidders submit sealed bids and the highest bid wins. Here, DAZN and Sky must decide their offers knowing the other party’s previous bid. In this format, both bidders are likely to hedge their offers, aiming to bid just enough to win while avoiding overspending. - English Auction
In an English auction, the price rises incrementally as bidders openly compete until one drops out. This format could trigger a bidding war, especially if both bidders believe the value of the rights could increase further. However, there’s a risk that one bidder drops out early, leading to a lower final price. Experts often favour first-price auctions when bidders are risk-averse and one bidder has a strong need to win. Conversely, in situations where common values are present, an English auction allows bidders to learn about each other’s valuations, potentially driving the price higher.
The Best of Both Worlds: A Multi-Stage Auction
Given the unique dynamics at play, the DFL could consider a multi-stage auction that combines the advantages of both the first-price and English auction formats:
- Confirmation Round
The DFL could first ask both DAZN and Sky if they are willing to confirm DAZN’s initial high bid. If one bidder confirms, they win the rights at that price. If neither confirms, the process moves to the next stage. - A. First-Price Auction
If neither party confirms the bid, a first-price auction is held. This encourages cautious bidding, as both parties will aim to win while minimising overspending.B. English Auction
If both bidders confirm DAZN’s original bid, the auction proceeds to an English auction, where the price rises incrementally until one bidder drops out. This approach leverages the risk-aversion of a first-price auction—where bidders who need to win are more likely to bid aggressively—while also capturing the benefits of an English auction, which is ideal if common values play a role or a bidding war can be induced. Moreover, it ensures that the DFL will likely secure at least the original DAZN bid from the first auction, creating a safety net while still allowing for higher returns if the bidding heats up.
Conclusion
The Bundesliga broadcasting rights re-auction is a unique case in auction theory, with both DAZN and Sky now forced to adjust their strategies based on new information. The DFL’s choice of auction format will be crucial in determining the final outcome. By opting for a multi-stage process, the DFL can maximise its chances of securing a high final price while minimising the risks associated with underbidding. The re-auction presents a real-world example of how game theory and market design play out in high-stakes negotiations, making it an exciting event for both broadcasters and game theory nerds alike.