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Auctions Versus Negotiations: The Role of Price Discrimination

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  • Chia-Hui Chen
  • Junichiro Ishida

Abstract

Auctions are a popular and prevalent form of trading mechanism, despite the restriction that the seller cannot price-discriminate among potential buyers. To understand why this is the case, we consider an auction-like environment in which a seller with an indivisible object negotiates with two asymmetric buyers to determine who obtains the object and at what price. The trading process resembles the Dutch auction, except that the seller is allowed to offer different prices to different buyers. We show that when the seller can commit to a price path in advance, the optimal outcome can generally be implemented. When the seller lacks such commitment power, however, there instead exists an equilibrium in which the seller's expected payoff is driven down to the second-price auction level. Our analysis suggests that having the discretion to price discriminate is not necessarily beneficial for the seller, and even harmful under plausible conditions, which could explain the pervasive use of auctions in practice.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0873.

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Date of creation: May 2013
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Handle: RePEc:dpr:wpaper:0873

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  1. Johannes Horner & Larry Samuelson, 2011. "Managing Strategic Buyers," Levine's Working Paper Archive 786969000000000025, David K. Levine.
  2. Giuseppe Moscarini & Marco Ottaviani, 1998. "Price Competition for an Informed Buyer," Cowles Foundation Discussion Papers 1199, Cowles Foundation for Research in Economics, Yale University.
  3. Krishna, Vijay, 2003. "Asymmetric English auctions," Journal of Economic Theory, Elsevier, vol. 112(2), pages 261-288, October.
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  6. Igal Hendel & Alessandro Lizzeri, 2003. "The Role Of Commitment In Dynamic Contracts: Evidence From Life Insurance," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 299-327, February.
  7. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  8. Johannes H�rner & Larry Samuelson, 2011. "Managing Strategic Buyers," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 379 - 425.
  9. Bergemann, Dirk & Valimaki, Juuso, 2000. "Experimentation in Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 213-34, April.
  10. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
  11. Hannu Vartiainen, 2013. "Auction Design Without Commitment," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 316-342, 04.
  12. Chia-Hui Chen, 2012. "Name Your Own Price at Priceline.com: Strategic Bidding and Lockout Periods," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1341-1369.
  13. Bulow, Jeremy I. & Klemperer, Paul, 2009. "Why Do Sellers (Usually) Prefer Auctions?," CEPR Discussion Papers 7411, C.E.P.R. Discussion Papers.
  14. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  15. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September.
  16. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
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