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Peaches, lemons, and cookies: Designing auction markets with dispersed information

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  • Abraham, Ittai
  • Athey, Susan
  • Babaioff, Moshe
  • Grubb, Michael D.

Abstract

We study how ex ante information asymmetries affect revenue in common-value second-price auctions, motivated by online advertising auctions where “cookies” inform individual advertisers about advertising opportunities. We distinguish information structures in which cookies identify “lemons” (low-value impressions) from those in which cookies identify “peaches” (high-value impressions). As this setting features multiple Nash equilibria, we introduce a new refinement, “tremble robust equilibrium” (TRE) and characterize the unique TRE in first-price and second-price common-value auctions with two bidders who each receive a binary signal. We find that common-value second-price auction revenues are vulnerable to ex ante information asymmetry if relatively rare cookies identify lemons, but not if they identify peaches. First-price auction revenues are substantially higher than second-price auction revenues under these conditions. Extensions show that these insights are robust.

Suggested Citation

  • Abraham, Ittai & Athey, Susan & Babaioff, Moshe & Grubb, Michael D., 2020. "Peaches, lemons, and cookies: Designing auction markets with dispersed information," Games and Economic Behavior, Elsevier, vol. 124(C), pages 454-477.
  • Handle: RePEc:eee:gamebe:v:124:y:2020:i:c:p:454-477
    DOI: 10.1016/j.geb.2020.09.004
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