Welcoming the Middlemen: Restricting Competition in Auctions by Excluding the Consumers

Abstract:     
We study an auction with two distinct type of potential bidders: consumers who wish to purchase the item for their own consumption and middlemen who wish to purchase the item for the purpose of reselling it to the final consumers. Typically, the behavior of the former is studied under the private values paradigm, while the behavior of the latter is studied under the common values paradigm. We consider the possibility that both types of bidders compete in the same auction. We show that, if the middlemen have access to a larger market of consumers than the auctioneer, then the auctioneer may prefer to prevent the consumers from participating in the auction. The intuition for this result is that the presence of consumers in the auction creates a "winner's curse" effect for the middlemen: In equilibrium, the latter win when part of their customer base has relatively low valuations. This effect makes the middlemen more conservative in their bidding when they compete with consumers. In the model we consider, middlemen can access a market of N consumers by spending a marketing cost c. In the auction that the auctioneer arranges, apart from the middlemen, only one randomly chosen consumer shows up. We show that as long as c>0, the auctioneer prefers the restricted auction, under which the consumer is prevented from participating.

JEL Classifications: D44

Working Paper Series