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Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions

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Listed author(s):
  • Kirkegaard, René
  • Per Baltzer Overgaard

    ()

    (Department of Economics, University of Aarhus, Denmark)

Abstract

We consider “must-sell” auctions with asymmetric buyers. First, we study auctions with two asymmetric buyers, where the distribution of valuations of the strong buyer is “stretched” relative to that of the weak buyer. Then, it is known that ineffcient first-price auctions are more profitable for the seller than effcient second-price auctions. This is because the former favor the weak buyer. However, we show that the seller can do one better by augmenting the first-price auction by a pre-auction offer made exclusively to the strong buyer. Should the strong buyer reject the offer, the object is simply sold in an ordinary first-price auction. The result is driven by the fact that the unmodified first-price auction is too favorable to the weak buyer, and that the pre-auction offer allows some correction of this to the benefit of the seller. Secondly, we show quite generally that pre-auction offers never increase the profitability of second-price auctions, since they introduce the wrong kind of favoritism from the perspective of seller profits.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2005-17.

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Length: 19
Date of creation: 13 Oct 2005
Handle: RePEc:aah:aarhec:2005-17
Contact details of provider: Web page: http://www.econ.au.dk/afn/

Keywords: first-price and second-price auctions; asymmetric bidders; pre-auction offers.;

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Find related papers by JEL classification:
  • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
  • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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  1. Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2008. "Price formation in a sequential selling mechanism," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 832-843, September.
  2. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
  3. Plum, M, 1992. "Characterization and Computation of Nash-Equilibria for Auctions with Incomplete Information," International Journal of Game Theory, Springer;Game Theory Society, vol. 20(4), pages 393-418.
  4. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
  5. Budish, Eric B. & Takeyama, Lisa N., 2001. "Buy prices in online auctions: irrationality on the internet?," Economics Letters, Elsevier, vol. 72(3), pages 325-333, September.
  6. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
  7. Lebrun, Bernard, 1999. "First Price Auctions in the Asymmetric N Bidder Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-142, February.
  8. Blume, Andreas & Heidhues, Paul, 2004. "All equilibria of the Vickrey auction," Journal of Economic Theory, Elsevier, vol. 114(1), pages 170-177, January.
  9. Lopomo, Giuseppe, 1998. "The English Auction Is Optimal Among Simple Sequential Auctions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 144-166, September.
  10. René Kirkegaard, 2006. "A short proof of the Bulow-Klemperer auctions vs. negotiations result," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 449-452, 06.
  11. René Kirkegaard & Per Baltzer Overgaard, 2008. "Buy-out prices in auctions: seller competition and multi-unit demands," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 770-789.
  12. Timothy Mathews, 2003. "A Risk Averse Seller in a Continuous Time Auction with a Buyout Option," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 5(2), January.
  13. Kirkegaard, René, 2009. "Asymmetric first price auctions," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1617-1635, July.
  14. Timothy Mathews, 2004. "The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature," Journal of Economics, Springer, vol. 81(1), pages 25-52, 01.
  15. Hidvegi, Zoltan & Wang, Wenli & Whinston, Andrew B., 2006. "Buy-price English auction," Journal of Economic Theory, Elsevier, vol. 129(1), pages 31-56, July.
  16. Eric Maskin & John Riley, 2000. "Asymmetric Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 413-438.
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Cited by:

  1. Bernard Lebrun, 2015. "Revenue-superior variants of the second-price auction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(2), pages 245-275, June.
  2. René Kirkegaard, 2007. "Comparative Statics and Welfare in Heterogeneous Contests: Bribes, Caps, and Performance Thresholds," Working Papers 0702, Brock University, Department of Economics.
  3. Richard Engelbrecht-Wiggans & Elena Katok, 2006. "E-sourcing in Procurement: Theory and Behavior in Reverse Auctions with Noncompetitive Contracts," Management Science, INFORMS, vol. 52(4), pages 581-596, April.
  4. Schmöller, Arno, 2010. "Bidding Behavior, Seller Strategies, and the Utilization of Information in Auctions for Complex Goods," Munich Dissertations in Economics 11175, University of Munich, Department of Economics.

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