Descending Price Optimally Coordinates Search
49 Pages Posted: 25 Mar 2016 Last revised: 15 Jul 2017
Date Written: July 14, 2017
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: Suggested Citation