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The optimality of being efficient : designing auctions

Author

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  • Ausubel, Lawerence M.
  • Cramton, Peter

Abstract

A cornerstone of the auction literature is the theory of"optimal auctions."'This theory uses mechanism design techniques to characterize, in general settings, the auction that maximizes the seller's expected revenues. One feature of the solution is that typically there is a conflict between the goals of revenue maximization and efficiency. The revenue-optimizing seller often either places goods in hands other than those who value them the most or withholds goods entirely from the market. However, the conclusion that the seller gains by assigning goods inefficiently depends critically on two strong assumptions: (1) the seller can prevent resale among bidders from occurring after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. In this paper, the authors examine how the optimal auction problem changes when one or both of these assumptions are relaxed. This paper is organized as follows. In section 2, the authors establish the seller's general incentive to misassign goods and they identify settings where the optimal auction is efficient. In section 3, they solve two variations on the optimal auction, which recognize the possibility of resale. Section 4 proves that perfect resale destroys the seller's incentive to misassign goods. Section 5 establishes that with perfect resale, any misassignment of goods results in strictly lower seller revenues than the best efficient assignment. In section 6, the paper shows that the Vickrey auction is not distorted by the possibility of resale.

Suggested Citation

  • Ausubel, Lawerence M. & Cramton, Peter, 1998. "The optimality of being efficient : designing auctions," Policy Research Working Paper Series 1985, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1985
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    References listed on IDEAS

    as
    1. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
    3. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
    4. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
    5. Mark Armstrong, 2000. "Optimal Multi-Object Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 455-481.
    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. 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.
    8. Edward Clarke, 1971. "Multipart pricing of public goods," Public Choice, Springer, vol. 11(1), pages 17-33, September.
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    11. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
    12. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-531, May.
    13. Levin, Dan & Smith, James L, 1996. "Optimal Reservation Prices in Auctions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1271-1283, September.
    14. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, University Library of Munich, Germany, revised 28 Apr 1998.
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    17. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19.
    18. Christopher Avery & Terrence Hendershott, 2000. "Bundling and Optimal Auctions of Multiple Products," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 483-497.
    19. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
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    21. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
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    Cited by:

    1. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
    2. Gert Brunekreeft & Roland Meyer & Margarethe Rammerstorfer, 2013. "Auction Design for a Strategic Reserve Market for Generation Adequacy: On the Incentives Under Different Auction Scoring Rules," Bremen Energy Working Papers 0014, Bremen Energy Research.
    3. Zhang, Jun & Wang, Ruqu, 2013. "Optimal mechanism design with resale via bargaining," Journal of Economic Theory, Elsevier, vol. 148(5), pages 2096-2123.

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