When are Auctions Best?

We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.auctions, jump bidding, sequential sales, procurement, entry.

When are Auctions Best?

We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.

Bargaining vs. price competition in a market with quality uncertainty

Economics;Price Policy

Bargaining with Incomplete Information

A central question in economics is understanding the difficulties that parties have in reaching mutually beneficial agreements. Informational differences provide an appealing explanation for bargaining inefficiencies. This chapter provides an overview of the theoretical and empirical literature on bargaining with incomplete information. The chapter begins with an analysis of bargaining within a mechanism design framework. A modern development is provided of the classic result that, given two parties with independent private valuations, ex post efficiency is attainable if and only if it is common knowledge that gains from trade exist. The classic problems of efficient trade with one-sided incomplete information but interdependent valuations, and of efficiently dissolving a partnership with two-sided incomplete information, are also reviewed using mechanism design. The chapter then proceeds to study bargaining where the parties sequentially exchange offers. Under one-sided incomplete information, it considers sequential bargaining between a seller with a known valuation and a buyer with a private valuation. When there is a "gap" between the seller's valuation and the support of buyer valuations, the seller-offer game has essentially a unique sequential equilibrium. This equilibrium exhibits the following properties: it is stationary, trade occurs in finite time, and the price is favorable to the informed party (the Coase Conjecture). The alternating-offer game exhibits similar properties, when a refinement of sequential equilibrium is applied. However, in the case of "no gap" between the seller's valuation and the support of buyer valuations, the bargaining does not conclude with probability one after any finite number of periods, and it does not follow that sequential equilibria need be stationary. If stationarity is nevertheless assumed, then the results parallel those for the "gap" case. However, if stationarity is not assumed, then instead a folk theorem obtains, so substantial delay is possible and the uninformed party may receive substantial surplus. The chapter also briefly sketches results for sequential bargaining with two-sided incomplete information. Finally, it reviews the empirical evidence on strategic bargaining with private information by focusing on one of the most prominent examples of bargaining: union contract negotiations.Bargaining; Delay; Incomplete Information

Endogenous Competition Alters the Structure of Optimal Auctions

Potential bidders respond to a sellerfs choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Sellerfs surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.

Learning and Beliefs in Non-Centralized Markets.

This dissertation uses microeconomic theory to examine learning and beliefs in markets that are not centralized, in order to refine our knowledge of how information asymmetries affect market outcomes. I approach problems in this space from a game theoretic perspective, first building an appropriate market game to study the question of interest, then characterizing the equilibria of the game, and finally applying those characterizations to the initial problem. The dissertation consists of three distinct chapters. The first of these examines the conditions that affect learning and efficiency in a decentralized market. Past research addressing this issue has shown in several models that learning is difficult and asymmetric information is costly. In a steady state environment, the first chapter shows that both learning and efficiency are possible if and only if the good being traded is divisible. This chapter identifies the divisibility of trade as a significant friction in decentralized markets. The second chapter studies how beliefs regarding a market front-runner affect surplus in a fragmented market. A front-runner is an agent who has advance knowledge of market orders, gained from either an illegal or a technological advantage. So far, research involving front-runners has placed restrictions on the behavior of other agents, assuming that agents cannot change their strategies based on the presence of a front-runner. This work provides a framework to relax those restrictions in order to allow agents to best respond to a front-runner. The research then suggests that the impact of a front-runner on traders' strategies generally leads to a decrease in total surplus. The third chapter again contributes to the literature on learning and efficiency in a decentralized market. This chapter studies the conditions that are necessary for learning and long-run efficiency in a non-stationary environment. Past research has obtained long-run efficiency if trade is divisible and bargaining is flexible; this research shows that only divisible trade is necessary. Furthermore, while past research requires traders use complex strategies in order to learn, our research demonstrates that traders may use simple strategies, and will learn by participating in the market and observing the actions of their match partners.PhDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/113592/1/tablante_1.pd

Sorting Out the Differences Between Signaling and Screening Models

In this paper we analyze games in which there is trade between informed and uninformed players. The informed know the value of the trade (for instance, the value of their productivity in a labor market example); the uninformed only know the distribution of attributes among the informed. The informed choose actions (education levels in the Spence model); the uninformed choose prices (wages of interest rates). We refer to games in which the informed move first as signaling games - they choose actions to signal their type. Games when the uninformed move first are referred to as screening games. We show that in sequential equilibria of screening games same contracts can generate positive profits and others negative profits, while in signaling games all contracts break even. However, if the indifference carves of the informed agents satisfy what roughly would amount to a single crossing property in two dimensions, and some technical conditions hold, then all contacts in the screening game break even, and the set of outcomes of the screening game is a subset of the outcomes of the corresponding signaling game. In the postscript we take a broad view of the strengths and weakness of the approach taken in this and other papers to problems of asymmetric information, and present recommendations for how future research should proceed in this field.

Why Do Sellers (Usually) Prefer Auctions?

We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.Auctions, jump bidding, sequential sales, procurement, entry