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Optimal nondiscriminatory auctions with favoritism

  • Federico Weinschelbaum


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

  • Leandro Arozamena

    (Department of Economics, UTDT & CONICET)

  • Nicolas Shunda

    (University of Redlands)

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.

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Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 110.

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Length: 19 pages
Date of creation: Mar 2012
Date of revision: Mar 2012
Handle: RePEc:sad:wpaper:110
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  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. Arozamena, Leandro & Weinschelbaum, Federico, 2011. "On favoritism in auctions with entry," Economics Letters, Elsevier, vol. 110(3), pages 265-267, March.
  3. 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.
  4. Roberto Burguet & Martin K. Perry, 2015. "Preferred Suppliers in Auction Markets," Working Papers 355, Barcelona Graduate School of Economics.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
  6. 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.
  7. Vagstad, Steinar, 1995. "Promoting fair competition in public procurement," Journal of Public Economics, Elsevier, vol. 58(2), pages 283-307, October.
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