Optimal Auction under Bidders Value Uncertainty

Yan Ju Dazhong Wang

School of Economics, SHUFE

April 20, 2014

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

1 / 12

Abstract

This paper discusses revenue maximization for the seller of a given auction good under an auction situation when bidders all have the same value distribution of the given auction good ex ante. In the papers setting, seller can give buyer access to get his true value without cost, which we call experience of the good. If the seller know the bidders distribution, he can sell the experience to the bidders to maximize his revenue; if the seller does not know the buyers distribution, he may robustly gain by freely giving out the experience chance to every potential bidder.

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

2 / 12

Outline

Introduction Model Setup Revenue maximizing when seller knowing the distribution Robust revenue without seller knowing the distribution Conclusion

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

3 / 12

1 Introduction
Since the seminal paper of William Vickery(1961), auction design has become a very important economic area where there are a fundamental asymmetry of market position. Quoting J. G. Riley and W. F. Samuelson(1981) , the choice of auction method employed rests with the monopolistic seller.

Many papers have studied the case of bidders have identical independent distribution of value for the auction good, which is known to the seller, while the bidders know their realized value as private information.

There are recently some papers trying to solve such a problem of buyers value uncertainty.
Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty April 20, 2014 4 / 12

1 Introduction cont

Jacques Cremer(2009) tries to consider costly information acquisitions effect on auctions in buyers value uncertainty settings. Jun Zhang(2013) has taken return policy into examination for solving buyers value uncertainty ex ante. Dirk Bergemann, Martin Pesendorfer(2007)has considered Information structures in optimal auctions when the seller has full control over the information precision that the bidders can get under costless revelation.

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

5 / 12

1 Introduction cont

What we do here is to consider a simple setting where there is costless information revelation method to the seller, but we cannot control the informaiton precisely. When the seller is in control of the information revelation, what is the optimal auction? What is the efciency and distribution implications? We would like to consider two ex ante situations:the seller as well as bidder know the distribution;only bidders know the distribution.

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

6 / 12

2 Model setup

A revenue maximizing seller(she) has a single indivisible good would like to use the second-price sealed bid auction form to sell the good. The reservation value of the seller is publicly known as vs . There are n bidders,each bidder is valuation of the object is vi , and vi has independent identical distribution F (x), which has support over [vs , +]. All parties are risk neutral. The seller controls the information revelation.She may reveal any bidder the information of his true value, though she does not know it herself.

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

7 / 12

3 Revenue maximizing when seller knowing the distribution

We rst get a useful lemma.

Lemma
The best strategy for a bidder who only knows his values distribution but not the exact value is to bid E(v).

Proof.
The bidder is bidding problem is
bi

max E(vi x|x < bi )G(bi ) = max

bi bi vs

(E(v) x)g(x)dx

(1)

Obviously, the best is bi = E(v).

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty April 20, 2014 8 / 12

3 Revenue maximizing when seller knowing the distribution cont

The following is another useful lemma.

Lemma
If buyer is given an opportunity to buy the chance of knowing his own value about the good, the maximum amount he would like to pay is
+ v E(v)

f (v)
vs vs

(v x)g(x)dxdv
vs

(E(v) x)g(x)dx

(2)

which is positive. With the help of the above lemmas characterizing bidders behavior, we have nd the following theorem

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

9 / 12

3 Revenue maximizing when seller knowing the distribution cont

Theorem
If the distribution is a common knowledge among the bidders and the seller, then the seller has enough knowledge to get a higher expectation due to her knowledge of the distribution of the bidders. If the n is larger than m, which is the critical point depending on the F, then her optimal choice it to set the price at
+ v E(v)

f (v)
vs vs

(v x)g(x)dxdv
vs

(E(v) x)g(x)dx

(3)

where g(x)dx = dF (n1) (x).and all the bidders buy the information of true values. Else she will set the price at And n-2 bidders buy the information of true values.
Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty April 20, 2014 10 / 12

4 Robust revenue without seller knowing the distribution

When bidders prior of the goods value is common knowledge among the bidders, but the seller does not know what the prior is, the seller does not have the knowledge to apply the above price setting strategy.

Theorem When n > 3, the choice of the seller to fully reveal the true value
information to the bidders can guarantee an expected revenue which is the largest(a max min against all possible F).
+ v

n
v s

f (v )
vs

xdF n1 (x)dv

(4)

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

11 / 12

5 Conclusion

The paper investigates the optimal auction when the seller controls the revelation of the true value. If the seller knows the buyers prior distribution, (1)When n is large, the sellers optimal strategy has the effect of fully reveal the true value to each bidder. And the full revelation result gives every bidders surplus expectation. (2)When n is small, the seller will set the price of information acquisition such that n-2 bidders will buy it. However, there is no surplus expectation for the buyer, and the result is not socially optimal. If the seller does not know the distribution ex ante, his optimal strategy to maximize the minimal expected surplus is to reveal the true value information to every bidder.

Yan Ju Dazhong Wang ( School of Economics, SHUFE) Optimal Auction under Bidders Value Uncertainty

April 20, 2014

12 / 12