Countering the Winner's Curse: Optimal Auction Design in a Common Value Model

Dirk Bergemann, Benjamin Brooks and Stephen Morris

No 2147R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We characterize revenue maximizing mechanisms in a common value environment where the value of the object is equal to the highest of bidders' independent signals. If the object is optimally sold with probability one, then the optimal mechanism is simply a posted price, with the highest price such that every type of every bidder is willing to buy the object. A sufficient condition for the posted price to be optimal among all mechanisms is that there is at least one potential bidder who is omitted from the auction. If the object is optimally sold with probability less than one, then optimal mechanisms skew the allocation towards bidders with lower signals. This can be implemented via a modified Vickrey auction, where there is a random reserve price for just the high bidder. The resulting allocation induces a "winner's blessing," whereby the expected value conditional on winning is higher than the unconditional expectation. By contrast, standard auctions that allocate to the bidder with the highest signal (e.g., the first-price, second-price or English auctions) deliver lower revenue because of the winner's curse generated by the allocation rule. Our qualitative results extend to more general common value environments where the winner's curse is large.

Keywords: Optimal auction; Common values; Maximum game; Posted price; Reserve price; Revenue equivalence (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 D83 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2018-11, Revised 2019-06
New Economics Papers: this item is included in nep-des, nep-exp, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Countering the winner's curse: optimal auction design in a common value model (2020)
Working Paper: Countering the Winner's Curse: Optimal Auction Design in a Common Value Model (2018)
Working Paper: Countering the Winner's Curse: Optimal Auction Design in a Common Value Model (2018)
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