Econ808auction

Econ808auction - When and Why not to Auction * Colin M....

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Unformatted text preview: When and Why not to Auction * Colin M. Campbell Department of Economics Rutgers University New Brunswick, New Jersey 08901 Phone: (732) 932-8259 Fax: (732) 932-7416 campbell@econ.rutgers.edu Dan Levin Department of Economics The Ohio State University Columbus, Ohio 43210 levin.36@osu.edu October, 2001 * We thank theNSF for funding, and Richard McLean and seminar participants at the University of Pittsburgh, Johns Hopkins University, and Washington University for helpful commentary. The authors take responsibility for any errors. Campbell is corresponding author. Abstract Standard auctions are known to be a revenue-maximizing way to sell an object under broad conditions when buyers are symmetric and have independent pri- vate valuations. We show that when buyers have interdependent valuations, auctions may lose their advantage, even if symmetry and independence of in- formation are maintained. In particular, selling mechanisms that sometimes allow a buyer who does not have the highest valuation to win the object will in general increase all buyers' willingness to pay, possibly enough to oset the loss to the seller of not always selling to the buyer with the greatest willingness to pay. Journal of Economic Literature Classication Numbers: D44, D82. Keywords: Auctions, Posted Prices, Interdependencies, Adverse Selection 1. INTRODUCTION Auctions hold agrand place amonginstitutions of exchange. The universal appeal of auctions has its source in their transparency to the participants, their competitive benets for the seller (if a sales auction) or buyer (if a procurement auction), and their allocative eciency. In addition to having a long tradition of use and associated interest, auctions have received a recent surge of attention from government, industry, and academia, due in part to the progress of wireless technology and expanded demand, from many sources, for spectrum rights. Current debate on spectrum sales centers mostly on how best to design an auction that takes account of specic features of that market; that an auction ought to be employed at all is taken as virtually self-evident. Theoretic justication for auctions is strong. A signature result of auction theory is that certain standard, recognizable auction rules, when formalized as games, can in fact be the revenue-maximizing way to sell an object even when a fully general and complex set of potential selling rules is available. The environment for which this result holds, viz., buyers are ex-ante identical, and have independently determined private valuations the distribution of which satises certain regularity conditions, represents the core case of auction theory. In this case, it is optimal for the seller to sell the object to the buyer with the highest valuation conditional on selling at all, an outcome that standard auction formats (rst-price, second- price, English, Dutch) deliver as an equilibrium....
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Econ808auction - When and Why not to Auction * Colin M....

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