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The Role of Outside Options in Auction Design

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Author Info
Nicolás Figueroa
Vasiliki Skreta ()

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Abstract

This paper studies revenue maximizing auctions when buyers’ outside options depend on their private information. The set-up is very general and encompasses a large number of potential applications. The main novel message of our analysis is that with type-dependent non-participation payoffs, the revenue maximizing assignment of objects can crucially depend on the outside options that buyers face. Outside options can therefore affect the degree of efficiency of revenue maximizing auctions. We show that depending on the shape of outside options, sometimes an optimal mechanism will allocate the objects in an ex-post efficient way, and other times, buyers will obtain objects more often than it is efficient. Our characterization rings a bell of caution. Modeling buyers outside options as being independent of their private information, is with loss of generality and can lead to quite misleading intuitions. Our solution procedure can be useful also in other models where type-dependent outside options arise endogenously, because, for instance, buyers can collude or because there are competing sellers. Type-Dependent Outside Options: JEL D44, C7, C72.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 231.

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Date of creation: 2007
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Handle: RePEc:edj:ceauch:231

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Jehiel, Phillipe & Moldovanu, Benny, 1998. "Efficient Design with Interdependent Valuations," Sonderforschungsbereich 504 Publications 98-22, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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  2. Paul Klemperer, 2004. "Auctions: Theory and Practice," Economics Papers 2004-W09, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  3. Jorge Aseff & Hector Chade, 2004. "An optimal auction with identity-dependent externalities," Econometric Society 2004 Latin American Meetings 254, Econometric Society.
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  4. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 455-81, July.
  5. Dana, James Jr. & Spier, Kathryn E., 1994. "Designing a private industry : Government auctions with endogenous market structure," Journal of Public Economics, Elsevier, vol. 53(1), pages 127-147, January. [Downloadable!] (restricted)
  6. Fernando Branco, 1996. "Multiple unit auctions of an indivisible good," Economic Theory, Springer, vol. 8(1), pages 77-101.
  7. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation, Yale University. [Downloadable!]
  8. Avery, Christopher & Hendershott, Terrence, 2000. "Bundling and Optimal Auctions of Multiple Products," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 483-97, July.
  9. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-92, June. [Downloadable!] (restricted)
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  10. Gale, Ian, 1990. "A multiple-object auction with superadditive values," Economics Letters, Elsevier, vol. 34(4), pages 323-328, December. [Downloadable!] (restricted)
  11. Krishna, Vijay & Maenner, Eliot, 2001. "Convex Potentials with an Application to Mechanism Design," Econometrica, Econometric Society, vol. 69(4), pages 1113-19, July.
  12. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December. [Downloadable!] (restricted)
  13. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September. [Downloadable!] (restricted)
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  14. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998. [Downloadable!]
  15. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April. [Downloadable!] (restricted)
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  16. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July. [Downloadable!] (restricted)
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  17. Philippe Jehiel & Benny Moldovanu, 2001. "A note of revenue maximization and efficiency in multi-object auctions," Economics Bulletin, Economics Bulletin, vol. 3, pages 1-5. [Downloadable!]
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  18. repec:att:wimass:19908 is not listed on IDEAS
  19. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19. [Downloadable!] (restricted)
  20. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 843644000000000222, UCLA Department of Economics. [Downloadable!]
  2. Nicolás Figueroa & Vasiliki Skreta, 2007. "Note on Optimal Auctions," Documentos de Trabajo 232, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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  3. Vasiliki Skreta, 2008. "On the Informed Seller Problem: Optimal Information Disclosure," Working Papers 08-10, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  4. Kucuksenel, Serkan, . "Interim efficient mechanism design with interdependent valuations," Working Papers 1254, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  5. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 122247000000001789, UCLA Department of Economics. [Downloadable!]
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