Standard Auctions with Identity-Dependent Externalities

Issue: Winter 2002

Pages: pp. 689-708

Authors: Gopal Das Varma

Title: Standard Auctions with Identity-Dependent Externalities

Abstract: I analyze equilibrium bidding behavior in the open ascending-bid auction with identity-dependent externalities. With reciprocal externalities, the allocation is determined by bidders' consumption values alone. With large nonreciprocal externalities, the open auction generates higher expected revenue compared to standard sealed-bid auctions. The progress of the open auction reveals more information about the identity of the potential winner, allowing active bidders greater opportunity to avoid incurring payoff-reducing externalities. The associated option value to staying active up until a relatively high price translates into higher expected revenue. Multiple bidders may sequentially quit at the same price, and relative to sealed-bid auctions, bidders experience less ex post regret.

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