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Auctions with Opportunistic Experts

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  • Basov Suren

    ()
    (La Trobe University)

  • Danilkina Svetlana

    ()
    (Melbourne University)

Abstract

In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike the standard model, we assume that bidding is conducted by an expert on behalf of the client, and that the client does not completely trust the expert's qualifications. In particular, if the client does not win the auction, but could have won it by submitting a bid below her valuation or won but feels she could have paid less for the object, the client asks the expert to justify the strategy. The objective of this paper is to incorporate the concern for the justifiability into the expert's objective function. We show that under some assumptions about the justification process the requirement of justifiability increases the optimal bid in the first price sealed-bid auction, while bidding the client's true value remains the optimal strategy in the second price auction sealed-bid auction. Hence, the first price auction may raise more revenue than the second price auction and thus it will be preferred by the seller. Both auctions allocate the good to the client with the highest valuation. However, the second price sealed-bid auction is more efficient, since the experts do not incur costs from the failure to justify their strategies.

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File URL: http://www.degruyter.com/view/j/bejte.2007.7.1/bejte.2007.7.1.1350/bejte.2007.7.1.1350.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 7 (2007)
Issue (Month): 1 (November)
Pages: 1-11

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Handle: RePEc:bpj:bejtec:v:7:y:2007:i:1:n:40

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  1. Stephanie Rosenkranz & Patrick W. Schmit, 2005. "Reserve prices in auctions as reference points," Working Papers 05-14, Utrecht School of Economics.
  2. Ran Spiegler, 2002. "Equilibrium in Justifiable Strategies: A Model of Reason-based Choice in Extensive-form Games," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 691-706.
  3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
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