Bidding to Lose? Auctions with Resale
AbstractAfter an auction, a losing bidder can purchase the prize from the winner. We show why a strong bidder may prefer to drop out of the auction before the price has reached her valuation, and acquire the prize in the aftermarket: a strong bidder may be in a better bargaining position in the aftermarket if her rival won at a relatively low price. So it can be common knowledge that, in equilibrium, a weak bidder will win the auction and, even without uncertainty about relative valuations, resale will take place. (Furthermore, the result is robust to the addition of bidding costs.) And the possibility of reselling to a strong bidder attracts weak bidders to participate in the auction, and raises the seller's revenue. We explore how the seller can manipulate the conditions under which wealth-constrained bidders can finance their bids in order to induce a resale-equilibrium which raises the auction price.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 116.
Date of creation: 01 Mar 2004
Date of revision: 01 Nov 2006
Publication status: Published in RAND Journal of Economics, 2007, 38(4), 1090-1112
Other versions of this item:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-22 (All new papers)
- NEP-DEV-2004-03-22 (Development)
- NEP-MIC-2004-03-22 (Microeconomics)
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