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Optimal selling mechanisms with countervailing positive externalities and an application to tradable retaliation in the WTO

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  • Chen, Bo
  • Potipiti, Tanapong

Abstract

We study revenue-maximizing mechanisms for a seller who sells an indivisible good to several buyers with positive, type-dependent and countervailing allocative externalities. To cope with the difficulty of types obtaining reservation utilities being endogenously determined, we first solve a minimax version of the seller's problem by generalizing Myerson's characterization techniques for the non-regular case. The solution is then shown to solve the seller's original maximin problem as well in our setting. We find that the seller's optimal mechanism normally features bunching even in the regular case and the type with the lowest expected payoff is typically not an extreme type. As an important illustration of our characterization procedures, we apply our results to the problem of selling retaliation rights in the WTO.

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  • Chen, Bo & Potipiti, Tanapong, 2010. "Optimal selling mechanisms with countervailing positive externalities and an application to tradable retaliation in the WTO," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 825-843, September.
    • Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:825-843
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    Cited by:

    1. Bhirombhakdi, Kornpob & Potipiti, Tanapong, 2012. "Practically Implementable Auction for a Good with Countervailing Positive Externalities," MPRA Paper 42911, University Library of Munich, Germany.
    2. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    3. Isabelle Brocas, 2013. "Optimal allocation mechanisms with type-dependent negative externalities," Theory and Decision, Springer, vol. 75(3), pages 359-387, September.
    4. Hummel, Patrick, 2016. "Position auctions with dynamic resizing," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 38-46.
    5. Staiger, Robert & Bagwell, Kyle & Bown, Chad, 2015. "Is the WTO Passé?," CEPR Discussion Papers 10672, C.E.P.R. Discussion Papers.
    6. Brocas, Isabelle, 2014. "Countervailing incentives in allocation mechanisms with type-dependent externalities," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 22-33.

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