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Auction design with endogenously correlated buyer types

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  • Krähmer, Daniel
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    Abstract

    This paper studies optimal auction design when the seller can affect the buyersʼ valuations through an unobservable ex ante investment. The key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyersʼ otherwise (conditionally) independent valuations. Assuming that the seller announces the mechanism before investing, the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments. Under these conditions, the seller can, in fact, extract the first best surplus almost fully.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053111001670
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 147 (2012)
    Issue (Month): 1 ()
    Pages: 118-141

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    Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:118-141

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Auction; Ex ante investment; Full surplus extraction; Correlation; Mechanism design;

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    References

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    1. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
    2. Neeman, Zvika, 2004. "The relevance of private information in mechanism design," Journal of Economic Theory, Elsevier, vol. 117(1), pages 55-77, July.
    3. Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and Productive Information Gathering," Papers 97.468, Toulouse - GREMAQ.
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    6. Ichiro Obara, 2007. "The Full Surplus Extraction Theorem with Hidden Actions," Levine's Bibliography 843644000000000137, UCLA Department of Economics.
    7. Bergemann, Dirk & Pesendorfer, Martin, 2007. "Information structures in optimal auctions," Journal of Economic Theory, Elsevier, vol. 137(1), pages 580-609, November.
    8. d'ASPREMONT, Claude & CRÉMER, Jacques & GÉRARD-VARET, Louis-André, 2002. "Balanced Bayesian mechanisms," CORE Discussion Papers 2002048, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Juan-JosÈ Ganuza & JosÈ S. Penalva, 2010. "Signal Orderings Based on Dispersion and the Supply of Private Information in Auctions," Econometrica, Econometric Society, vol. 78(3), pages 1007-1030, 05.
    10. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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    12. Zhao, Rui R., 2008. "Rigidity in bilateral trade with holdup," Theoretical Economics, Econometric Society, vol. 3(1), March.
    13. Dirk Bergemann & Karl H Schlag, 2007. "Pricing without Priors," Levine's Bibliography 122247000000001557, UCLA Department of Economics.
    14. Parreiras, Sergio O., 2005. "Correlated information, mechanism design and informational rents," Journal of Economic Theory, Elsevier, vol. 123(2), pages 210-217, August.
    15. Kosenok, Grigory & Severinov, Sergei, 2008. "Individually rational, budget-balanced mechanisms and allocation of surplus," Journal of Economic Theory, Elsevier, vol. 140(1), pages 126-161, May.
    16. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
    17. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation for Research in Economics, Yale University.
    18. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
    19. Barelli, Paulo, 2009. "On the genericity of full surplus extraction in mechanism design," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1320-1332, May.
    20. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
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