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The Role of Outside Options in Auction Design

  • Nicolas Figueroa
  • Vasiliki Skreta

This paper studies revenue maximizing auctions when buyers’ outside options depend on their private information. The set-up is very general and encompasses a large number of potential applications. The main novel message of our analysis is that with type-dependent non-participation payoffs, the revenue maximizing assignment of objects can crucially depend on the outside options that buyers face. Outside options can therefore affect the degree of efficiency of revenue maximizing auctions. We show that depending on the shape of outside options, sometimes an optimal mechanism will allocate the objects in an ex-post efficient way, and other times, buyers will obtain objects more often than it is efficient. Our characterization rings a bell of caution. Modeling buyers outside options as being independent of their private information, is with loss of generality and can lead to quite misleading intuitions. Our solution procedure can be useful also in other models where type-dependent outside options arise endogenously, because, for instance, buyers can collude or because there are competing sellers. Type-Dependent Outside Options: JEL D44, C7, C72.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000140.

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Date of creation: 21 Jun 2006
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Handle: RePEc:cla:levrem:321307000000000140
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  1. Jehiel, Phillipe & Moldovanu, Benny, 1999. "A Note on Revenue Maximization and Efficiency in Multi-Object Auctions," Sonderforschungsbereich 504 Publications 99-73, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  2. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
  3. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
  4. Jorge Aseff & Hector Chade, 2008. "An optimal auction with identity-dependent externalities," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 731-746.
  5. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
  6. 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.
  7. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  9. Avery, Christopher & Hendershott, Terrence, 2000. "Bundling and Optimal Auctions of Multiple Products," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 483-97, July.
  10. Gale, Ian, 1990. "A multiple-object auction with superadditive values," Economics Letters, Elsevier, vol. 34(4), pages 323-328, December.
  11. Paul Klemperer, 2004. "Auctions: Theory and Practice," Economics Papers 2004-W09, Economics Group, Nuffield College, University of Oxford.
  12. Fernando Branco, 1996. "Multiple unit auctions of an indivisible good," Economic Theory, Springer, vol. 8(1), pages 77-101.
  13. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
  15. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  16. Dana, James Jr. & Spier, Kathryn E., 1994. "Designing a private industry : Government auctions with endogenous market structure," Journal of Public Economics, Elsevier, vol. 53(1), pages 127-147, January.
  17. Krishna, Vijay & Maenner, Eliot, 2001. "Convex Potentials with an Application to Mechanism Design," Econometrica, Econometric Society, vol. 69(4), pages 1113-19, July.
  18. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19.
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