DP11783 Optimal Auction Design in a Common Value Model

Author(s): Dirk Bergemann, Benjamin A Brooks, Stephen Morris
Publication Date: January 2017
Keyword(s): common values, descending auction, global incentive constraints, local incentive constraints, maximum value game, Optimal auction, posted price, resale, revenue maximization, wallet game
JEL(s): C72, D44, D82, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11783

We study auction design when bidders have a pure common value equal to the maximum of their independent signals. In the revenue maximizing mechanism, each bidder makes a payment that is independent of his signal and the allocation discriminates in favor of bidders with lower signals. We provide a necessary and sufficient condition under which the optimal mechanism reduces to a posted price under which all bidders are equally likely to get the good. This model of pure common values can equivalently be interpreted as model of resale: the bidders have independent private values at the auction stage, and the winner of the auction can make a take-it-or-leave-it-offer in the secondary market under complete information.