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Auction design with endogenously correlated buyer types

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  • Krähmer, Daniel

Abstract

This paper studies optimal auction design when the seller can affect the buyersʼ valuations through an unobservable ex ante investment. The key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyersʼ otherwise (conditionally) independent valuations. Assuming that the seller announces the mechanism before investing, the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments. Under these conditions, the seller can, in fact, extract the first best surplus almost fully.

Suggested Citation

  • Krähmer, Daniel, 2012. "Auction design with endogenously correlated buyer types," Journal of Economic Theory, Elsevier, vol. 147(1), pages 118-141.
  • Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:118-141
    DOI: 10.1016/j.jet.2011.11.015
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    References listed on IDEAS

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    More about this item

    Keywords

    Auction; Ex ante investment; Full surplus extraction; Correlation; Mechanism design;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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