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Bidding to lose? Auctions with resale

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  • Marco Pagnozzi

Abstract

After an auction, a losing bidder can purchase the prize from the winner. We show why a strong bidder may prefer to drop out of the auction before the price has reached her valuation, and acquire the prize in the aftermarket: a strong bidder may be in a better bargaining position in the aftermarket if her rival won at a relatively low price. So it can be common knowledge that, in equilibrium, a weak bidder will win the auction and, even without uncertainty about relative valuations, resale will take place. (Furthermore, the result is robust to the addition of bidding costs.) And the possibility of reselling to a strong bidder attracts weak bidders to participate in the auction, and raises the seller's revenue. We explore how the seller can manipulate the conditions under which wealth-constrained bidders can finance their bids in order to induce a resale-equilibrium which raises the auction price.

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Bibliographic Info

Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 38 (2007)
Issue (Month): 4 (December)
Pages: 1090-1112

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Handle: RePEc:bla:randje:v:38:y:2007:i:4:p:1090-1112

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  1. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
  2. Ken Binmore & Paul Klemperer, 2001. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses," Economics Papers 2002-W4, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
  3. Giacomo Calzolari & Alessandro Pavan, 2005. "Monopoly with Resale," Discussion Papers 1405, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Garratt, Rod & Troger, Thomas E, 2003. "Speculation in Second-Price Auctions with Resale," University of California at Santa Barbara, Economics Working Paper Series qt0bj7w3z6, Department of Economics, UC Santa Barbara.
  5. Sutton, John, 1986. "Non-cooperative Bargaining Theory: An Introduction," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 709-24, October.
  6. Haile,P.A., 1999. "Auctions with resale," Working papers 33, Wisconsin Madison - Social Systems.
  7. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
  8. Klemperer, Paul, 2002. "How (not) to run auctions: The European 3G telecom auctions," European Economic Review, Elsevier, vol. 46(4-5), pages 829-845, May.
  9. Philip A. Haile, 2001. "Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales," American Economic Review, American Economic Association, vol. 91(3), pages 399-427, June.
  10. Paul Klemperer, 2000. "What Really Matters in Auction Design," Economics Series Working Papers 2000-W26, University of Oxford, Department of Economics.
  11. Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November.
  12. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  13. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  14. Simon Board, 2007. "Bidding into the Red: A Model of Post-Auction Bankruptcy," Journal of Finance, American Finance Association, vol. 62(6), pages 2695-2723, December.
  15. Lawrence M. Ausubel & Peter Cramton, 1998. "The Optimality of Being Efficient," Papers of Peter Cramton 98wpoe, University of Maryland, Department of Economics - Peter Cramton, revised 18 Jun 1999.
  16. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers 12664, Iowa State University, Department of Economics.
  17. Haile, Philip A., 2000. "Partial Pooling at the Reserve Price in Auctions with Resale Opportunities," Games and Economic Behavior, Elsevier, vol. 33(2), pages 231-248, November.
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