Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions

We consider “must-sell” auctions with asymmetric buyers. First, we study auctions with two asymmetric buyers, where the distribution of valuations of the strong buyer is “stretched” relative to that of the weak buyer. Then, it is known that inefficient first-price auctions are more profitable for the seller than efficient second-price auctions. This is because the former favor the weak buyer. However, we show that the seller can do one better by augmenting the first-price auction by a pre-auction offer made exclusively to the strong buyer. Should the strong buyer reject the offer, the object is simply sold in an ordinary first-price auction. The result is driven by the fact that the unmodified first-price auction is too favorable to the weak buyer, and that the pre-auction offer allows some correction of this to the benefit of the seller. Secondly, we show quite generally that pre-auction offers never increase the profitability of second-price auctions, since they introduce the wrong kind of favoritism from the perspective of seller profits.first-price and second-price auctions; asymmetric bidders; pre-auction offers

Look How Little I’m Advertising!

This paper studies the role of advertising and prices as signals of quality in a purely static setting, where repeat purchases are suppressed altogether, but where advertising affects demand directly. We first show, under standard regularity assumptions, that the high-quality firm will distort its price upwards and its level of advertising downwards compared to the complete-information case. We then show, under relatively mild additional conditions, that the high-quality firm will choose a level of advertising below that of the low-quality firm, even if the high-quality firm advertises most under complete information. Hence, empirically, a high price and a modest advertising budget may well signal high quality.quality; signaling; pricing; advertising

Information Exchange, Market Transparency and Dynamic Oligopoly

In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.

Buy-Out Prices in Online Auctions: Multi-Unit Demand.

On many online auction sites it is now possible for a seller to augment his auction with a maximum or buy-out price. The use of this instrument has been justified in 'one-shot' auctions by appeal to impatience or risk aversion. Here we o.er additional justification by observing that trading on internet auctions is not of a 'one-shot' nature, but that market participants expect more transactions in the future. This has important implications when bidders desire multiple objects. Specifically, it is shown that an early seller has an incentive to introduce a buy-out price, if similar products are o.ered later on by other sellers. The buy-out price will increase revenue in the current auction, but revenue in future auctions will decrease, as will the sum of revenues. In contrast, if a single seller owns multiple units, overall revenue will increase, if buyers anticipate the use of buy-out prices in the future by this seller. In both cases, an optimally chosen buy-outprice introduces potential inefficiencies in the allocation.sequential auctions; multi-unit demands; buy-out prices

Market Transparency and Competition Policy.

We survey some of the literature on the effects of improved market transparency on competition in oligopoly. Generally, improved transparency from the perspective of firms makes detection of deviations from tacitly collusive agreements easier, thus facilitating oligopolistic coordination. On the other hand, improved transparency from the perspective of consumers, particularly in terms of easier comparability of goods characteristics, has ambiguous effects: More elastic demands make deviations from collusive prices more profitable to firms in the short run, but they also make future retaliation by rivals more severe. Which of these forces will dominate in a dynamic oligopoly competition is shown to depend on the markets-specifics. In light of the theoretical results, we discuss the likely effects on inter-firm competition of information exchange and online trading institutions as well as the American and European competition policy attitude towards market transparency.market transparency; repeated oligopoly; secret price-cutting; customer switching

Market Transparency: A Mixed Blessing?

Antitrust practitioners and consumers protectionists often argue that market transparency should be improved to allow consumers to shop around for bargain prices thereby putting pressure on oligopolists´ pricing. We model how transparency, interpreted as the comparability from the point of view of consumers of the characteristics of goods and services, affects the outcome of a repeated oligopoly. Improved transparency may make consumers switch suppliers more easily. This increases the static temptation of individual firms to deviate from tacitly agreed prices, but at the same time the future punishment may become more severe. When the number of firms is small, the "optimal degree of transparency" may not be perfect transparency, unless the oligopolists may rely on sophisticated, optimal punishment strategies. When the number of firms grows larger, the optimal degree of transparency increases, and from some point onward perfect transparency is optimal. We discuss the various policy implications of these results.market transparency; customer switching; repeated oligopoly

Information Exchange, Market Transparency and Dynamic Oligopoly

In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role

Prices as Signals of Quality in Duopoly

This paper studies price signaling in a multi-sender context with two competing firms. Either firm may offer a high or a low quality, but potential customers are, initially, incompletely informed about the quality available at a given outlet. In particular, consumers do not know a priori whether the goods offered are vertically differentiated or homogenous, and, in the latter case, whether they are of high or low quality. We show that fully revealing equilibria are ruled out by a natural equilibrium refinement, whereas partial revelation of information is possible in equilibrium. However, we note that a non-revealing outcome with standard Bertrand-features (pricing at cost) seems likely, whether the goods offered are vertically differentiated or homogenous.Duopoly signaling; Quality uncertainty; Pooling vs. separation

Modest Advertising Signals Strength.

This paper presents a signaling model where both price and advertising expenditures are used as signals of the initially unobservable quality of a newly introduced experience good. Consumers can be either "fastidious" or "indifferent". Fastidious individuals place a greater value on a high-quality product and a lesser value on the low-quality product than do indifferent individuals. It is shown that a sensible separating equilibrium exists where both firms set their full information prices. However, the high-quality firm cuts advertising expenditures below the full information level of the low-quality firm, even if the full information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond positively to advertising cuts and correctly identify the product quality. Hence, modest advertising may signal high quality.product quality; informative advertising; signaling; signal reversal