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The Optimality of Being Efficient

In an optimal auction, a revenue-optimizing seller often awards goods inefficiently, either by placing them in the wrong hands or by withholding goods from the market. This conclusion rests on two assumptions: (1) the seller can prevent resale among bidders after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. We examine how the optimal auction problem changes when these assumptions are relaxed. In sharp contrast to the no resale assumption, we assume perfect resale: all gains from trade are exhausted in resale. In a multiple object model with independent signals, we characterize optimal auctions with resale. We prove generally that with perfect resale, the seller's incentive to misassign goods is destroyed. Moreover, with discrete types, any misassignment of goods strictly lowers the seller's revenue from the optimum. In auction markets followed by perfect resale, it is optimal to assign goods to those with the highest values.

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File URL: http://www.cramton.umd.edu/papers1995-1999/98wp-optimality-of-being-efficient.pdf
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Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 98wpoe.

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Length: 29 pages
Date of creation: 28 May 1998
Date of revision: 18 Jun 1999
Handle: RePEc:pcc:pccumd:98wpoe
Note: Working Paper
Contact details of provider: Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
Fax: (202) 318-0520
Web page: http://www.cramton.umd.edu

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  1. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
  2. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  3. P. Dasgupta & Eric Maskin, 1998. "Efficient Auctions," Harvard Institute of Economic Research Working Papers 1857, Harvard - Institute of Economic Research.
  4. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  5. Levin, Dan & Smith, James L, 1996. "Optimal Reservation Prices in Auctions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1271-83, September.
  6. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  7. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
  8. Jeremy Bulow & Paul Klemperer, 1994. "Auctions vs. Negotiations," NBER Working Papers 4608, National Bureau of Economic Research, Inc.
  9. Harstad, Ronald M., 1993. "Auctions With Endogenous Bidder Participation," Discussion Paper Serie B 251, University of Bonn, Germany.
  10. Horstmann, Ignatius J & LaCasse, Chantale, 1997. "Secret Reserve Prices in a Bidding Model with a Resale Option," American Economic Review, American Economic Association, vol. 87(4), pages 663-84, September.
  11. Lawrence M. Ausubel & Peter Cramton, 2004. "Vickrey Auctions with Reserve Pricing," Papers of Peter Cramton 99wpvic, University of Maryland, Department of Economics - Peter Cramton, revised 28 Jun 1999.
  12. 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.
  13. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  14. Bernard Caillaud & Jacques Robert, 2003. "Implementing the Optimal Auction," CIRANO Working Papers 2003s-31, CIRANO.
  15. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
  16. repec:att:wimass:9702 is not listed on IDEAS
  17. 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.
  18. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  19. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
  20. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  21. Philip A. Haile, 2001. "Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales," American Economic Review, American Economic Association, vol. 91(3), pages 399-427, June.
  22. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  23. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  24. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  25. Cremer, Jacques, & Riordan, Michael H, 1985. "A Sequential Solution to the Public Goods Problem," Econometrica, Econometric Society, vol. 53(1), pages 77-84, January.
  26. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19.
  27. Haile,P.A., 1999. "Auctions with resale," Working papers 33, Wisconsin Madison - Social Systems.
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