Efficient Competition Through Cheap Talk: The Case of Competing Auctions

Kyungmin Kim and Philipp Kircher

Econometrica, 2015, vol. 83, issue 5, 1849-1875

Abstract: We consider a large market where auctioneers with private reservation values compete for bidders by announcing cheap‐talk messages. If auctioneers run efficient first‐price auctions, then there always exists an equilibrium in which each auctioneer truthfully reveals her type. The equilibrium is constrained efficient, assigning more bidders to auctioneers with larger gains from trade. The choice of the trading mechanism is crucial for the result. Most notably, the use of second‐price auctions (equivalently, ex post bidding) leads to the nonexistence of any informative equilibrium. We examine the robustness of our finding in various dimensions, including finite markets and equilibrium selection.

Date: 2015
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