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Optimal nondiscriminatory auctions with favoritism

Author

Listed:
  • Federico Weinschelbaum

    () (Department of Economics, Universidad de San Andres & CONICET)

  • Leandro Arozamena

    (Department of Economics, UTDT & CONICET)

  • Nicolas Shunda

    (University of Redlands)

Abstract

In many auction settings, there is favoritism: the seller's welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We find the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue.

Suggested Citation

  • Federico Weinschelbaum & Leandro Arozamena & Nicolas Shunda, 2012. "Optimal nondiscriminatory auctions with favoritism," Working Papers 110, Universidad de San Andres, Departamento de Economia, revised Mar 2012.
  • Handle: RePEc:sad:wpaper:110
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    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc110.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
    1. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
    2. Leandro Arozamena & Nicholas Shunda & Federico Weinschelbaum, 2014. "Optimal nondiscriminatory auctions with favoritism," Economics Bulletin, AccessEcon, vol. 34(1), pages 252-262.
    3. Naegelen, Florence & Mougeot, Michel, 1998. "Discriminatory public procurement policy and cost reduction incentives," Journal of Public Economics, Elsevier, vol. 67(3), pages 349-367, March.
    4. Arozamena, Leandro & Weinschelbaum, Federico, 2011. "On favoritism in auctions with entry," Economics Letters, Elsevier, vol. 110(3), pages 265-267, March.
    5. Vagstad, Steinar, 1995. "Promoting fair competition in public procurement," Journal of Public Economics, Elsevier, vol. 58(2), pages 283-307, October.
    6. Roberto Burguet & Martin K. Perry, 2009. "Preferred suppliers in auction markets," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 283-295.
    7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
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    Cited by:

    1. Leandro Arozamena & Nicholas Shunda & Federico Weinschelbaum, 2014. "Optimal nondiscriminatory auctions with favoritism," Economics Bulletin, AccessEcon, vol. 34(1), pages 252-262.

    More about this item

    Keywords

    auctions; favoritism; nondiscriminatorymechanisms;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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