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Common Value Allocation Mechanisms with Private Information: Lotteries or Auctions?

  • Alexander Matros

    ()

    (Darla Moore School of Business, University of South Carolina)

  • Alex Possajennikov

    ()

    (Department of Economics, University of Nottingham)

We consider mechanisms for allocating a common-value prize between two players in an incomplete information setting. In this setting, each player receives an independent private signal about the prize value. The signals are from a discrete distribution and the value is increasing in both signals. First, we characterize symmetric equilibria in four mechanisms: a lottery; and Â…rst-price, second-price, and all-pay auctions. Second, we establish revenue equivalence of these auction mechanisms in this setting. Third, we describe conditions under which the expected revenue is higher in the lottery than in any of the auctions. Finally, we identify an optimal mechanism and its implementation by means of reserve prices in lottery and auction mechanisms.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2014-07.

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Date of creation: Jul 2014
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Handle: RePEc:not:notcdx:2014-07
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  1. Cédric Wasser, 2013. "Incomplete information in rent-seeking contests," Economic Theory, Springer, vol. 53(1), pages 239-268, May.
  2. Konrad, Kai A., 2002. "Altruism and envy in contests: an evolutionarily stable symbiosis
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  3. Alexander Matros, 2007. "Contests with a Stochastic Number of Players," Working Papers 323, University of Pittsburgh, Department of Economics, revised Sep 2008.
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  7. Malueg, David A. & Orzach, Ram, 2009. "Revenue comparison in common-value auctions: Two examples," Economics Letters, Elsevier, vol. 105(2), pages 177-180, November.
  8. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603.
  9. Paul Klemperer, 1997. "Auctions with Almost Common Values: The Wallet Game and its Applications," Economics Series Working Papers 1998-W03, University of Oxford, Department of Economics.
  10. Wang, Ruqu, 1991. "Common-value auctions with discrete private information," Journal of Economic Theory, Elsevier, vol. 54(2), pages 429-447, August.
  11. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 511-18, October.
  12. Epstein, Gil S. & Mealem, Yosef & Nitzan, Shmuel, 2012. "Lotteries vs. All-Pay Auctions in Fair and Biased Contests," IZA Discussion Papers 7032, Institute for the Study of Labor (IZA).
  13. Johannes Münster, 2009. "Repeated Contests with Asymmetric Information," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(1), pages 89-118, 02.
  14. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
  15. Harstad, Ronald M, 1990. "Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 421-29, April.
  16. Franke, Jörg & Kanzow, Christian & Leininger, Wolfgang & Schwartz, Alexandra, 2013. "Lottery versus All-Pay Auction Contests: A Revenue Dominance Theorem," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79998, Verein für Socialpolitik / German Economic Association.
  17. Karl Wärneryd, 2012. "Multi-player contests with asymmetric information," Economic Theory, Springer, vol. 51(2), pages 277-287, October.
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