DP13332 Countering the Winner's Curse: Optimal Auction Design in a Common Value Model

Author(s): Dirk Bergemann, Benjamin A Brooks, Stephen Morris
Publication Date: November 2018
Date Revised: November 2020
Keyword(s): advantageous selection, Adverse Selection, common values, maximum game, neutral selection, Optimal auction, posted price, revenue equivalence
JEL(s): C72, D44, D82, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13332

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 revenue maximizing solution is to sell the object with probability one, then an optimal mechanism is simply a posted price, namely, the highest price such that every type of every bidder is willing to buy the object. If the object is optimally sold with probability less than one, then optimal mechanisms skew the allocation towards bidders with lower signals. 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. Our qualitative results extend to more general common value environments with a strong winner's curse.