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Optimal Mechanism Design with Resale Via Bargaining

32 Pages Posted: 13 Jun 2016  

Jun Zhang

University of Technology Sydney

Ruqu Wang

Queen's University - Department of Economics

Date Written: June 22, 2013

Abstract

In this paper, we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer, where inter-buyer resale cannot be prohibited. The resale market is modeled as a stochastic ultimatum bargaining game between the two buyers. We fully characterize an optimal mechanism under general conditions. Surprisingly, in this optimal mechanism, the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market. The seller sells only to the publicly known buyer, and reveals no additional information to the resale market. The possibility of resale causes the seller to sometimes hold back the object, which under our setup is never optimal if resale is prohibited. We find that the seller’s revenue is increasing in the publicly known buyer’s bargaining power in the resale market. When the publicly known buyer has full bargaining power, Myerson’s optimal revenue is achieved; when the publicly known buyer has no bargaining power, a conditionally efficient mechanism prevails.

Keywords: Auctions, Mechanism Design, Resale, Bargaining power

JEL Classification: C72, D44, D82, D83, L12

Suggested Citation

Zhang, Jun and Wang, Ruqu, Optimal Mechanism Design with Resale Via Bargaining (June 22, 2013). Available at SSRN: https://ssrn.com/abstract=2793652 or http://dx.doi.org/10.2139/ssrn.2793652

Jun Zhang (Contact Author)

University of Technology Sydney ( email )

EDG, School of Business
University of Technology Sydney
Sydney, NSW
Australia

HOME PAGE: http://www.zhangjun.weebly.com

Ruqu Wang

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada K7L 3N6

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