A Dynamic Mechanism and Surplus Extraction Under Ambiguity
AbstractIn the standard independent private values (IPV)model, each bidder’s beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and study the question of auction design in an IPV setting characterized by ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion; in particular, they are represented by the epsilon-contamination model. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity - in all of these, types other than the lowest participating type obtain a positive surplus. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion – even when the setting is IPV in all other respects – a dynamic mechanism can have additional bite over its static counterparts.
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Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 08/24.
Date of creation: Jul 2008
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Other versions of this item:
- Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
- Subir Bose & Arup Daripa, 2007. "A Dynamic Mechanism and Surplus Extraction Under Ambiguity," Birkbeck Working Papers in Economics and Finance 0716, Birkbeck, Department of Economics, Mathematics & Statistics.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-31 (All new papers)
- NEP-CTA-2008-08-31 (Contract Theory & Applications)
- NEP-UPT-2008-08-31 (Utility Models & Prospect Theory)
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