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A dynamic mechanism and surplus extraction under ambiguity

By Subir Bose and Arup Daripa


In the standard independent private values (IPV)model, each bidder’s beliefs about the values\ud of any other bidder is represented by a unique prior. In this paper we relax this assumption\ud and study the question of auction design in an IPV setting characterized by ambiguity: bidders\ud have an imprecise knowledge of the distribution of values of others, and are faced with a set of\ud priors. We also assume that their preferences exhibit ambiguity aversion; in particular, they are\ud represented by the epsilon-contamination model. We show that a simple variation of a discrete\ud Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV\ud without ambiguity as well as with optimal static auctions with ambiguity - in all of these,\ud types other than the lowest participating type obtain a positive surplus. An important point\ud of departure is that the modified Dutch mechanism we consider is dynamic rather than static,\ud establishing that under ambiguity aversion–even when the setting is IPV in all other respects–a\ud dynamic mechanism can have additional bite over its static counterparts

Topics: Ambiguity Aversion, Epsilon Contamination, Modified Dutch Auction, Dynamic Mechanism, Surplus Extraction
Publisher: Dept. of Economics, University of Leicester
Year: 2008
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