Descending Price Optimally Coordinates Search

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 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 qualitatively confirm these conclusions.

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

JEL Classification: D44, D47, D82, D83