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A Dynamic Mechanism and Surplus Extraction Under Ambiguity

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  • Subir Bose
  • Arup Daripa

Abstract

In the standard independent private values (IPV)model, each bidder’s beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and study the question of auction design in an IPV setting characterized by ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion; in particular, they are represented by the epsilon-contamination model. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity - in all of these, types other than the lowest participating type obtain a positive surplus. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion – even when the setting is IPV in all other respects – a dynamic mechanism can have additional bite over its static counterparts.

Suggested Citation

  • Subir Bose & Arup Daripa, 2008. "A Dynamic Mechanism and Surplus Extraction Under Ambiguity," Discussion Papers in Economics 08/24, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:08/24
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    More about this item

    Keywords

    Ambiguity Aversion; Epsilon Contamination; Modified Dutch Auction; Dynamic Mechanism; Surplus Extraction;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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