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Descending Price Optimally Coordinates Search

49 Pages Posted: 25 Mar 2016 Last revised: 15 Jul 2017

Bobby Kleinberg

Microsoft Research New England

Bo Waggoner

Harvard University Department of Computer Science

E. Glen Weyl

Microsoft Research; Yale University

Date Written: July 14, 2017

Abstract

Contrary to common practice in selling homes and start-ups, mechanism design theory typically recommends English (increasing price) over Dutch (decreasing price) auctions. Yet this theory neglects the uncertain investment required to investigate purchases. We show that English and other standard auctions burden such investments with further uncertainty about the price necessary to win, potentially eliminating all gains from trade. In contrast, Dutch auctions preserve their properties without information costs because they guarantee, at the moment when investigation is optimal, a price at which the good can be purchased. Numerical explorations based partly on prior empirical results confirm these conclusions qualitatively.

Keywords: Dutch auction, information acquisition, search, matching, descending price, assignment

JEL Classification: D44, D47, D82, D83

Suggested Citation

Kleinberg, Bobby and Waggoner, Bo and Weyl, E. Glen, Descending Price Optimally Coordinates Search (July 14, 2017). Available at SSRN: https://ssrn.com/abstract=2753858 or http://dx.doi.org/10.2139/ssrn.2753858

Robert Kleinberg

Microsoft Research New England ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

HOME PAGE: http://www.cs.cornell.edu/~rdk/

Bo Waggoner

Harvard University Department of Computer Science ( email )

33 Oxford Street
Cambridge, MA 02138
United States

Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

One Memorial Drive
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)

HOME PAGE: http://www.glenweyl.com

Yale University ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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