CFDP Revision Date
June 1, 2019
Journal of Economic Literature (JEL) Code(s)
C72, D44, D82, D83
We characterize revenue maximizing mechanisms in a common value environment where the value of the object is equal to the highest of bidders’ independent signals. If the object is optimally sold with probability one, then the optimal mechanism is simply a posted price, with the highest price such that every type of every bidder is willing to buy the object. A suﬀicient condition for the posted price to be optimal among all mechanisms is that there is at least one potential bidder who is omitted from the auction. If the object is optimally sold with probability less than one, then optimal mechanisms skew the allocation towards bidders with lower signals. This can be implemented via a modiﬁed Vickrey auction, where there is a random reserve price for just the high bidder. The resulting allocation induces a “winner’s blessing,” whereby the expected value conditional on winning is higher than the unconditional expectation. By contrast, standard auctions that allocate to the bidder with the highest signal (e.g., the ﬁrst-price, second-price or English auctions) deliver lower revenue because of the winner’s curse generated by the allocation rule. Our qualitative results extend to more general common value environments where the winner’s curse is large.
Bergemann, Dirk; Brooks, Benjamin; and Morris, Stephen, "Countering the Winner’s Curse: Optimal Auction Design in a Common Value Model" (2018). Cowles Foundation Discussion Papers. 118.