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Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions

Rene Kirkegaard () and Per Overgaard ()

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We consider “must-sell” auctions with asymmetric buyers. First, we study auctions with two asymmetric buyers, where the distribution of valuations of the strong buyer is “stretched” relative to that of the weak buyer. Then, it is known that ineffcient first-price auctions are more profitable for the seller than effcient second-price auctions. This is because the former favor the weak buyer. However, we show that the seller can do one better by augmenting the first-price auction by a pre-auction offer made exclusively to the strong buyer. Should the strong buyer reject the offer, the object is simply sold in an ordinary first-price auction. The result is driven by the fact that the unmodified first-price auction is too favorable to the weak buyer, and that the pre-auction offer allows some correction of this to the benefit of the seller. Secondly, we show quite generally that pre-auction offers never increase the profitability of second-price auctions, since they introduce the wrong kind of favoritism from the perspective of seller profits.

Keywords: first-price and second-price auctions; asymmetric bidders; pre-auction offers. (search for similar items in EconPapers)
JEL-codes: D02 D44 D82 (search for similar items in EconPapers)
Pages: 19
Date: 2005-10-13
New Economics Papers: this item is included in nep-gth and nep-mic
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Related works:
Journal Article: Pre-auction offers in asymmetric first-price and second-price auctions (2008) Downloads
Working Paper: Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions (2005) Downloads
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