Optimal Discrimination-free Auctions

Abstract

This paper introduces a second-price auction with a flexible reserve price, where the reserve price for the top bidder is not fixed but rather determined as a function of all losing bids. We show that when bidders are ex-ante heterogeneous, a second-price auction with an optimally chosen flexible reserve price not only generates strictly higher expected revenue than that of a second-price auction with any fixed reserve price but is also revenue-maximizing among all mechanisms that implement discrimination-free social choice functions. We also provide an axiomatic characterization of all second-price auctions with a flexible reserve price. Finally, we discuss real-life implementation.

Keywords: Discrimination, mechanism design, optimal auction, re�serve price

JEL Classification: D44, D47, D82