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Seller Cheap Talk in Almost Common Value Auction

Listed author(s):
  • LI Daniel Zhiyun

    ()

    (Durham Business School, Durham University)

We study seller cheap talk problem in a modified almost common value auction, where there are potential entrants who need to pay entry costs for entering the auction. In almost common value auctions, a seller suffers great revenue losses due to the aggravated winner's curse problem. In our modified model, the inside bidders are more sensitive to the signals sent by the seller, and by revealing the information about the object valuation, the seller faces the trade-off between the benefit of increased competition and that of higher bids by weak inside bidders. For instance, a low message will attract the potential entrants into the auction, as a result of greater winning opportunity, and a high message will encourage the weak since bidders to bid more aggressively, as a result of increased valuation. Under quite plausible conditions, there exists an informative equilibrium in this cheap talk game, which will either increase the expected revenue of the auction, or the efficiency of final allocation.

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 12 (2012)
Issue (Month): 1 (March)
Pages: 1-31

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Handle: RePEc:bpj:bejtec:v:12:y:2012:i:1:n:8
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  1. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  2. Juan-José Ganuza, 2004. "Ignorance Promotes Competition: An Auction Model of Endogenous Private Valuations," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 583-598, Autumn.
  3. Levin, Dan & Kagel, John H., 2005. "Almost common values auctions revisited," European Economic Review, Elsevier, vol. 49(5), pages 1125-1136, July.
  4. Bikhchandani, Sushil, 1988. "Reputation in repeated second-price auctions," Journal of Economic Theory, Elsevier, vol. 46(1), pages 97-119, October.
  5. Mares, Vlad & Harstad, Ronald M., 2003. "Private information revelation in common-value auctions," Journal of Economic Theory, Elsevier, vol. 109(2), pages 264-282, April.
  6. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  7. Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
  8. Simon Board, 2009. "Revealing information in auctions: the allocation effect," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 125-135, January.
  9. Christopher Avery & John H. Kagel, 1997. "Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 573-603, 09.
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