The Statistical Structure of Bidding for Oil and Mineral Rights

Abstract

Analysis of lease auctions shows that bids on a given tract tend to be lognormally distributed. Also, the ratio of the winning bid to the product of the average bid and the square root of the number of bidders on a tract is essentially a lognormal variate; the logarithm of the ratio has expected value zero and variance 0.078. This surprising result follows from an observed consistency in the standard deviation of the underlying lognormal distribution of bids. A graphic device for rapidly evaluating the efficacy and efficiency of an observed bidding policy is described.