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Excluding Compromise: Negotiating Only With Polarized Interests

Richard Van Weelden ()

No 6329, Working Paper from Department of Economics, University of Pittsburgh

Abstract: We consider an auction involving bidders who are “polarized.†There are three potentialbidders, a moderate, a leftist, and a rightist who are polarized in the sense thatnon-moderate bidders prefer the moderate to win the auction rather than the bidder onthe other side of the spectrum. The seller cannot commit to an optimal mechanism, butcan decide which bidders to allow to participate. While greater competition is generallythought to be beneficial for the seller, we identify conditions under which the seller canincrease her expected revenue by preventing the moderate bidder from participating. Byexcluding the moderate, the seller increases the willingness to pay of the polarized bidders.Rather than serving as a means of bringing about compromise, our analysis suggeststhat organized negotiations can serve instead to exacerbate conflict. While potentially revenueenhancing, excluding the moderate always makes the auction less efficient; in fact,the incentive to exclude moderates is greatest precisely when it is most harmful from awelfare perspective. We discuss applications of our model in economics and politics.

Date: 2018-01
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