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Auctions with Options to Re-auction

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Author Info

  • Grant, S.
  • Kajii, A.
  • Menezes, F.
  • Ryan, M.

    (Tilburg University, Center for Economic Research)

Abstract

We examine the role of seller bidding and reserve prices in an infinitely repeated independent-private-value (IPV) ascending-price auction.The seller has a single object that she values at zero.At the end of any auction round, she may either sell to the highest bidder or pass-in the object and hold a new auction next period.New bidders are drawn randomly in each round.The ability to re-auction motivates a notion of reserve price as the option value of retaining the object for re-auctioning.Even in the absence of a mechanism with which to commit to a reserve price, the optimal secret reserve is shown to exceed zero. However, despite the infinite repetition, there may be significant value to the seller from a binding reserve price commitment: the optimal binding reserve is higher than the optimal "secret" reserve, and may be substantially so, even with very patient players.Furthermore, reserve price commitments may even be socially preferable at high discount factors.We also show that the optimal phantom bidding strategy for the seller is revenue-equivalent to a commitment to an optimal public reserve price.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-55.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200255

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Web page: http://center.uvt.nl

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Keywords: auctions; bidding; internet;

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References

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  1. Chris Jones & Flavio Menezes & Francis Vella, 2004. "Auction Price Anomalies: Evidence from Wool Auctions in Australia," The Economic Record, The Economic Society of Australia, vol. 80(250), pages 271-288, 09.
  2. Dale Mortensen, 1984. "Job Search and Labor Market Analysis," Discussion Papers 594, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Holt, Charles A, Jr, 1979. "Uncertainty and the Bidding for Incentive Contracts," American Economic Review, American Economic Association, vol. 69(4), pages 697-705, September.
  4. Lucking-Reiley, David, 2000. "Auctions on the Internet: What's Being Auctioned, and How?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 227-52, September.
  5. Robert H. Porter, 1992. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Discussion Papers 1008, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-92, June.
  7. Ruqu Wang, 1991. "Auctions Versus Posted-Price Selling," Working Papers 812, Queen's University, Department of Economics.
  8. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  9. Graham, Daniel A. & Marshall, Robert C. & Richard, Jean-Francois, 1990. "Phantom bidding against heterogeneous bidders," Economics Letters, Elsevier, vol. 32(1), pages 13-17, January.
  10. Burguet, Roberto & Sakovics, Jozsef, 1996. "Reserve Prices without Commitment," Games and Economic Behavior, Elsevier, vol. 15(2), pages 149-164, August.
  11. Indranil Chakraborty & Georgia Kosmopoulou, 2004. "Auctions with shill bidding," Economic Theory, Springer, vol. 24(2), pages 271-287, August.
  12. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  13. R. Preston McAfee & Daniel Vincent, 1994. "Sequentially Optimal Auctions," Discussion Papers 1104, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  15. Horstmann, I.J. & LaCasse, C., 1995. "Secret Reserve Prices in a Bidding Model with a Re-Sale Option," Working Papers 9507e, University of Ottawa, Department of Economics.
  16. Engelbrecht-Wiggans Richard, 1993. "Optimal Auctions Revisited," Games and Economic Behavior, Elsevier, vol. 5(2), pages 227-239, April.
  17. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Harstad, Ronald M. & Kagel, John H. & Levin, Dan, 1990. "Equilibrium bid functions for auctions with an uncertain number of bidders," Economics Letters, Elsevier, vol. 33(1), pages 35-40, May.
  19. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  20. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  21. Alvin E. Roth & Axel Ockenfels, 2000. "Last Minute Bidding and the Rules for Ending Second-Price Auctions: Theory and Evidence from a Natural Experiment on the Internet," NBER Working Papers 7729, National Bureau of Economic Research, Inc.
  22. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
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Citations

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Cited by:
  1. Glowicka, Ela & Beck, Jonathan, 2006. "A note on reserve price commitments in the Vickrey auction," MPRA Paper 6669, University Library of Munich, Germany.
  2. Tsuchihashi, Toshihiro, 2012. "Sequential Internet auctions with different ending rules," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 583-598.
  3. Flávio Menezes & Matthew Ryan, 2009. "Coasian dynamics in repeated English auctions," International Journal of Game Theory, Springer, vol. 38(3), pages 349-366, November.
  4. Octavian Carare, 2012. "Reserve Prices in Repeated Auctions," Review of Industrial Organization, Springer, vol. 40(3), pages 225-247, May.

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