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Auctions with Financial Externalities

Author

Listed:
  • Emiel Maasland
  • Sander Onderstal

Abstract

We study sealed-bid auctions with financial externalities, i.e., auctions in which losers’ utilities depend on how much the winner pays. In the unique symmetric equilibrium of the first-price sealed-bid auction (FPSB), larger financial externalities result in lower bids and in a lower expected revenue. The unique symmetric equilibrium of the second-price sealed-bid auction (SPSB) reveals ambiguous effects. We further show that a resale market does not have an effect on the equilibrium bids and that FPSB yields a lower expected revenue than SPSB. With a reserve price, we find an equilibrium for FPSB that involves pooling at the reserve price. For SPSB we derive a necessary and sufficient condition for the existence of a weakly separating equilibrium, and give an expression for the equilibrium.
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Suggested Citation

  • Emiel Maasland & Sander Onderstal, 2007. "Auctions with Financial Externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(3), pages 551-574, September.
    • Handle: RePEc:spr:joecth:v:32:y:2007:i:3:p:551-574
    DOI: 10.1007/s00199-006-0119-1
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    1. Maasland, E. & Onderstal, A.M., 2002. "Optimal Auctions with Financial Externalities," Other publications TiSEM f69f3ee8-a267-4e09-82b1-9, Tilburg University, School of Economics and Management.
    2. van Damme, E.E.C., 1990. "Fair division under asymmetric information," Discussion Paper 1990-70, Tilburg University, Center for Economic Research.
    3. Maasland, E. & Onderstal, A.M., 2002. "Auctions with Financial Externalities," Other publications TiSEM f9ffd48b-e33c-4443-895b-0, Tilburg University, School of Economics and Management.
    4. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
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    More about this item

    Keywords

    Auctions; Financial externalities; Reserve price; C72; D44;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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