A Dynamic Mechanism and Surplus Extraction Under Ambiguity

Subir Bose and Arup Daripa ()

No 08/24, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

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.

Keywords: Ambiguity Aversion; Epsilon Contamination; Modified Dutch Auction; Dynamic Mechanism; Surplus Extraction (search for similar items in EconPapers)
JEL-codes: D44 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cta and nep-upt
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Related works:
Journal Article: A dynamic mechanism and surplus extraction under ambiguity (2009)
Working Paper: A Dynamic Mechanism and Surplus Extraction Under Ambiguity (2007)
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