The Role of Outside Options in Auction Design
45 Pages Posted: 17 Apr 2008
Date Written: Sept, 2007
This paper studies revenue maximizing auctions when buyers' outside options depend on their private information. The set-up is very general and encompasses a large number of potential applications. The main novel message of our analysis is that with type-dependent non-participation payouts, the revenue maximizing assignment of objects can crucially depend on the outside options that buyers face. Outside options can therefore affect the degree of efficiency of revenue maximizing auctions. We show that depending on the shape of outside options, sometimes an optimal mechanism will allocate the objects in an ex-post efficient way, and other times, buyers will obtain objects more often than it is efficient. Our characterization rings a bell of caution. Modeling buyers' outside options as being independent of their private information, is with loss of generality and can lead to quite misleading intuitions. Our solution procedure can be useful also in other models where type-dependent outside options arise endogenously, because, for instance, buyers can collude or because there are competing sellers.
Keywords: Optimal Multi Unit Auctions, Type Dependent Outside Options, Externalities, Mechanism Design, Type-Dependent Outside Options
JEL Classification: D44, C7, C72
Suggested Citation: Suggested Citation