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Optimal nondiscriminatory auctions with favoritism

  • Leandro Arozamena

    ()

    (Universidad Torcuato Di Tella and CONICET)

  • Nicholas Shunda

    ()

    (University of Redlands)

  • Federico Weinschelbaum

    ()

    (Universidad de San Andres and CONICET)

In many auction settings, there is favoritism: the seller's welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We find the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue.

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File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I1-P26.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 34 (2014)
Issue (Month): 1 ()
Pages: 252-262

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Handle: RePEc:ebl:ecbull:eb-13-00718
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  1. Vagstad, Steinar, 1995. "Promoting fair competition in public procurement," Journal of Public Economics, Elsevier, vol. 58(2), pages 283-307, October.
  2. Leandro Arozamena & Federico Weinschelbaum, 2010. "On Favoritism in Auctions with Entry," Working Papers 103, Universidad de San Andres, Departamento de Economia, revised May 2010.
  3. Roberto Burguet & Martin K. Perry, 2008. "Preferred Suppliers in Auction Markets," UFAE and IAE Working Papers 752.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Naegelen, Florence & Mougeot, Michel, 1998. "Discriminatory public procurement policy and cost reduction incentives," Journal of Public Economics, Elsevier, vol. 67(3), pages 349-367, March.
  5. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
  6. Leandro Arozamena & Nicholas Shunda & Federico Weinschelbaum, 2014. "Optimal nondiscriminatory auctions with favoritism," Economics Bulletin, AccessEcon, vol. 34(1), pages 252-262.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
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