Decision Sciences Seminar
Monday February 04, 2013
10:00AM - 11:30AM
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.