The Value of Commitment in Auctions with Matching

Abstract

In many auctions, a good match between the bidder and seller raises the value of the contract for both parties although information about the quality of the match may be incomplete. This paper examines the case in which the bidder is better informed about the quality of his match with the seller than the seller is. We derive the optimal mechanism for this setting and investigate whether the seller requires commitment power to implement it. It is shown that once the reserve price is set, it is optimal for the seller to do away with any matching considerations and allocate the contract on the basis of price alone. If matching is sufficiently important to the seller, the optimal mechanism may be implemented without commitment. However, if matching is not sufficiently important, the seller suffers a loss when he is unable to commit. The magnitude of this loss increases as the importance of matching decreases.Asymmetries, Auctions, Auction Theory, Bidding, Matching, Mechanism Design, Signaling