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.

[1]  William Vickrey,et al.  Counterspeculation, Auctions, And Competitive Sealed Tenders , 1961 .

[2]  E. H. Clarke.  Multipart pricing of public goods , 1971 .

[3]  R. Coase.  Durability and Monopoly , 1972, The Journal of Law and Economics.

[4]  Theodore Groves,et al.  Incentives in Teams , 1973 .

[5]  Roger B. Myerson,et al.  Optimal Auction Design , 1981, Math. Oper. Res..

[6]  M. Satterthwaite,et al.  Efficient Mechanisms for Bilateral Trading , 1983 .

[7]  P. Cramton,et al.  Dissolving a Partnership Efficiently , 1985 .

[8]  Jacques Cremer,et al.  A Sequential Solution to the Public Goods Problem , 1985 .

[9]  R. McAfee,et al.  Auctions with entry , 1987 .

[10]  Richard P. McLean,et al.  FULL EXTRACTION OF THE SURPLUS IN BAYESIAN AND DOMINANT STRATEGY AUCTIONS , 1988 .

[11]  Richard Engelbrecht-Wiggans,et al.  Revenue equivalence in multi-object auctions , 1988 .

[12]  Lawrence M. Ausubel,et al.  REPUTATION IN BARGAINING AND DURABLE GOODS MONOPOLY , 1989 .

[13]  Chi-Fu Huang,et al.  Auctions with resale markets : an exploratory model of treasury bill markets , 1989 .

[14]  F. Hahn,et al.  Optimal Multi-Unit Auctions , 1989 .

[15]  F. Hahn.  The Economics of missing markets, information, and games , 1990 .

[16]  Ronald M. Harstad.  Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry , 1990, Journal of Political Economy.

[17]  P. Reny,et al.  Correlated Information and Mechanism Design , 1992 .

[18]  Ronald M. Harstad.  Auctions With Endogenous Bidder Participation , 1993 .

[19]  Donald J. Meyer.  First price auctions with entry: An experimental investigation , 1993 .

[20]  Dan Levin,et al.  Equilibrium in Auctions with Entry , 1994 .

[21]  Lawrence M. Ausubel,et al.  Demand Reduction and Inefficiency in Multi-Unit Auctions , 2014 .

[22]  Ignatius J. Horstmann,et al.  Secret Reserve Prices in a Bidding Model with a Re-Sale Option , 1995 .

[23]  Jeremy I. Bulow,et al.  Auctions versus Negotiations , 1996 .

[24]  Dan Levin,et al.  Optimal Reservation Prices in Auctions , 1996 .

[25]  Vijay Krishna,et al.  Efficient Mechanism Design , 1998 .

[26]  Philip A. Haile.  Auctions with resale , 1999 .

[27]  C. Avery,et al.  Bundling and Optimal Auctions of Multiple Products , 2000 .

[28]  M. Armstrong.  Optimal Multi-Object Auctions , 2000 .

[29]  Philip A. Haile.  Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales , 2001 .