Modelling Competitive Behavior
A single seller of an indivisible object wishes to sell the good to one of many buyers. The seller has zero value for the good, the buyers have a commonly known identical value of one. This article attempts to determine strategic environments that ensure the seller's ability to exploit the competitive behavior of the buyers to extract all the surplus in the game. I show that in many simple dynamic games, there are subgame-perfect equilibria that involve the seller's giving up the good for free. Even if the seller has an informational advantage that allows him to keep bidders from learning the bidding behavior of their opponents, there still exist (perfect Bayesian) equilibria that involve a sale at the price of zero. However, in this case, a simple refinement in the spirit of sequential equilibria can be used to rule out such collusive behavior and to show that the unique equilibrium outcome satisfying this refinement yields the seller a price of one.
Volume (Year): 23 (1992)
Issue (Month): 4 (Winter)
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