98wp-optimality-of-being-efficient

98wp-optimality-of-being-efficient - The Optimality of...

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1 The Optimality of Being Efficient Lawrence M. Ausubel and Peter Cramton* University of Maryland 18 June 1999 Abstract In an optimal auction, a revenue-optimizing seller often awards goods inefficiently, either by placing them in the wrong hands or by withholding goods from the market. This conclusion rests on two assumptions: (1) the seller can prevent resale among bidders after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. We examine how the optimal auction problem changes when these assumptions are relaxed. In sharp contrast to the no resale assumption, we assume perfect resale: all gains from trade are exhausted in resale. In a multiple object model with independent signals, we characterize optimal auctions with resale. We prove generally that with perfect resale, the seller’s incentive to misassign goods is destroyed. Moreover, with discrete types, any misassignment of goods strictly lowers the seller’s revenue from the optimum. In auction markets followed by perfect resale, it is optimal to assign goods to those with the highest values. JEL No. : D44 (Auctions) Keywords : Auctions, Multiple Object Auctions, Resale Send comments to: Professors Lawrence M. Ausubel or Peter Cramton Department of Economics University of Maryland College Park, MD 20742-7211 ausubel@econ.umd.edu cramton@umd.edu (301) 405-3495 (301) 405-6987 *The authors gratefully acknowledge the support of the National Science Foundation and the World Bank. We thank Susan Athey, Milton Harris, John Riley, Valter Sorana, S. Viswanathan, Robert Wilson, and seminar participants at the Maryland Auction Conference, the Econometric Society Summer Meetings, the Utah Winter Finance Conference, and the Society of Financial Studies Conference on Price Formation for helpful comments.
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2 The Optimality of Being Efficient Lawrence M. Ausubel and Peter Cramton 1 Introduction A cornerstone of the auction literature is the theory of “optimal auctions.” 1 This theory uses mechanism design techniques to characterize, in general settings, the auction that maximizes the seller’s expected revenues. One feature of the solution is that typically there is a conflict between the goals of revenue maximization and efficiency. The revenue-optimizing seller often either misassigns goods (placing them in hands other than those who value them the most) or withholds goods (restricting the quantity brought to market). However, the conclusion that the seller gains by misassigning and withholding goods depends critically on two strong assumptions: (1) the seller can prevent resale among bidders from occurring after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. In this paper, we examine how the optimal auction problem changes when one or both of these assumptions are relaxed.
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This note was uploaded on 10/21/2009 for the course ECON ECON703 taught by Professor Professorpetercramton during the Fall '09 term at Maryland.

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98wp-optimality-of-being-efficient - The Optimality of...

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