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Decision Sciences Seminar

Monday February 04, 2013


10:00AM - 11:30AM



Alejandro Francetich
Stanford GSB


Becoming a Neighbor: Endogenous Winner's Curse in Dynamic Mechanisms

Two units of a time-sensitive good are to be allocated one at a time over two periods. Agents have interdependent valuations. The common component of the valuation is unobserved ex-ante; it is only observed privately through experience. Thus, allocating the first-period unit leads to an informational asymmetry in the second period. I show that incentive compatibility precludes discrimination among types with the same valuation, leading to lower expected future welfare and making the first best unattainable. I identify the second best, which is implemented by a sequential auction in which bidders are asked to pay a deposit before submitting bids in the first period. The deposit discourages low types and adjusts bidders┬┐ continuation payoffs according to the resulting information structure. To maximize revenues, the seller allocates the second-period unit according to the second best and captures the expected welfare via entry fees. With only short-term commitment power, the second-period auction is a scoring-rule auction with endogenous reserve prices. Double sourcing the first- period unit is desirable (profitable) if valuations (virtual utilities) are close to tied. Applications include oil-tract auctions, government procurements, and online-advertisement auctions.

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