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Optimality and Robustness of the English Auction

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  • Lopomo, Giuseppe

Abstract

This paper attempts to reconcile the observed popularity of the English auction with the hypothesis that the trading mechanism is chosen with the objective of maximizing the seller's expected revenue. Under the assumptions of Milgrom and Weber's [20] 'general symmetric model,' I show the following three results. First, the 'augumented' English auction, in which the auctioneer sets the reserve price after all but one bidder have dropped out, generates at least as much seller's expected revenue as any ex post incentive-compatible (EPIC) and individually rational (EPIR) direct mechanisms. EPIC and EPIR direct mechanisms correspond to "belief-free" selling procedures. Thus this restriction of the set of feasible selling mechanisms aims at capturing a notion of robustness with respect to pertubations of the buyers' beliefs about their opponents' private information. Second, in the larger set of mechanisms, characterized by the property that 'losers do not pay,' ther! e exist auctions that generate a higher seller's expected revenue than the (augmented) English auction. Third, with two buyers, for a large class of signals' distributions, the augmented English auction maximizes the seller's expected revenue among all selling procedures where the loser does not pay and each buyer's payment is nondecreaseing in his own signal. With private values, these two conditions are satisfied by many equilibria in a class of bidding mechanisms, which includes approximations of both the Dutch auction and the English auction with discrete price increments. With more than two buyers, the English auction is optmal among all ex post efficient mechanisms where the losers do not pay and each buyer's payment is monotone in his signal.
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  • Lopomo, Giuseppe, 2001. "Optimality and Robustness of the English Auction," Games and Economic Behavior, Elsevier, vol. 36(2), pages 219-240, August.
    • Handle: RePEc:eee:gamebe:v:36:y:2001:i:2:p:219-240
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    Cited by:

    1. David Genesove & James Hansen, 2014. "Predicting Dwelling Prices with Consideration of the Sales Mechanism," RBA Research Discussion Papers rdp2014-09, Reserve Bank of Australia.
    2. Dominic Coey & Bradley Larsen & Kane Sweeney, 2019. "The bidder exclusion effect," RAND Journal of Economics, RAND Corporation, vol. 50(1), pages 93-120, March.
    3. Felipe Balmaceda, 2020. "Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 601-637, June.
    4. Hannu Vartiainen, 2003. "Auction Design without Commitment," Working Papers 2003.24, Fondazione Eni Enrico Mattei.
    5. Mezzetti, Claudio & Tsetlin, Ilia, 2009. "Auctions in which losers set the price," Games and Economic Behavior, Elsevier, vol. 66(2), pages 855-864, July.
    6. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-1575, September.
    7. Laurent Lamy, 2013. "“Upping the ante”: how to design efficient auctions with entry?," RAND Journal of Economics, RAND Corporation, vol. 44(2), pages 194-214, June.
    8. Bikhchandani, Sushil & Haile, Philip A. & Riley, John G., 2002. "Symmetric Separating Equilibria in English Auctions," Games and Economic Behavior, Elsevier, vol. 38(1), pages 19-27, January.
    9. Cadsby, C. Bram & Du, Ninghua & Wang, Ruqu & Zhang, Jun, 2016. "Goodwill Can Hurt: A theoretical and experimental investigation of return policies in auctions," Games and Economic Behavior, Elsevier, vol. 99(C), pages 224-238.
    10. Krishna, Vijay, 2003. "Asymmetric English auctions," Journal of Economic Theory, Elsevier, vol. 112(2), pages 261-288, October.
    11. Ruqu Wang & Jun Zhang, 2010. "Common Value Auctions With Return Policies," Working Paper 1235, Economics Department, Queen's University.

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    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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