Auction Equilibrium with Costly Information Acquisition (original) (raw)

Equilibrium with Costly Information Acquisition

1997

This paper presents a simple model of auction equilibrium. The distinctive feature of the model is that each bidder may discover the value that the item represents for herself, provided she spends some amount in order to be well informed. For each agent, the decision of whether or not to acquire information depends on a private cost of information acquisition and on her conjectures regarding the behavior of other bidders. A rational expectations equilibrium is characterized. (*) Department of Economics, University of Illinois at Urbana-Champaign and Department of Economics, University of California at Santa Barbara. Research supported in part by NSF Grant SBR-9496303. The authors appreciate comments from Richard Engelbrecht-Wiggans, Charles Kahn, and Steven Williams on an earlier version of this paper. A helpful suggestion from Adolf Hildenbrand is also acknowledged. None of them bears responsibilities for shortcomings or omissions.

Ignorance Promotes Competition: An Auction Model with Endogenous Private Valuations

The RAND Journal of Economics, 2004

We study a situation in which an auctioneer wishes to sell an object to one of N risk-neutral bidders with heterogeneous preferences. The auctioneer does not know bidders' preferences but has private information about the characteristics of the object, and must decide how much information to reveal prior to the auction. We show that the auctioneer has incentives to release less information than would be e±cient and that the amount of information released increases with the level of competition (as measured by the number of bidders). Furthermore, in a perfectly competitive market the auctioneer would provide the e±cient level of information.

Information acquisition in an all-pay auction contest

We develop a two-player all-pay auction model where an incumbent competes with an entrant. The incumbent’s valuation is publicly known, whereas the entrant’s valuation is unknown but has a publicly known prior distribution. However, before competing in the all-pay auction, the entrant can acquire additional information about his valuation through a learning experiment. This experiment enables him to learn his valuation perfectly, but we also allow for intermediate levels of information. We find that the entrant maximizes his expected payoff by perfectly learning his valuation. Furthermore, the entrant has a greater willingness to pay for information when competing against an incumbent with a similar ex-ante valuation, and a lesser willingness to pay for information when competing against a stronger or weaker incumbent. Nonetheless, the entrant is less willing to pay for information when he competes with a weaker incumbent than a stronger one. We then test the robustness of these res...

On the choice of obtaining and disclosing the common value in auctions

Artificial Intelligence, 2014

This paper introduces a game-theoretic analysis of auction settings where bidders' private values depend on an uncertain common value, and only the auctioneer has the option to purchase information to remove that uncertainty. Here, the auctioneer's mission is to reason about whether to purchase the information and, after purchasing it, whether to disclose it to the bidders. Unlike prior work, here the model assumes that bidders are aware of the auctioneer's option to purchase the external information but not necessarily aware of her decision. Our analysis of the individual revenue-maximizing strategies results in the characterization of a Bayesian Nash equilibrium profile. Our equilibrium's analysis results in several findings including the following non trivial results: (i) the availability of external information may minimize the auctioneer's expected revenue; (ii) using the pricing scheme for expensive information may benefit the auctioneer; (iii) in contrast to traditional results, increasing the number of bidders does not necessarily increase expected revenue.

Efficiency and information aggregation in auctions with costly information

Review of Economic Design, 2003

Consider an auction in which k identical objects are sold to n > k bidders who each have a value for one object which can have both private and common components to it. Private information concerning the common component of the object is not exogenously given, but rather endogenous and bidders face a cost to becoming informed. If the cost of information is not prohibitively high, then the equilibrium price in a uniform price auction will not aggregate private information, in contrast to the costless information case. Moreover, for a wide class of auctions if the cost of information is not prohibitively high then the objects can only be allocated in a weakly efficient sense, and then only if the equilibrium proportion of endogenously informed agents is vanishing as the economy grows. In spite of these results, it is shown that there is a mechanism for which there exist equilibria and for which (weak) efficiency is achieved as the economy grows in the face of endogenous information acquisition.

Auction and the informed seller problem

Games and Economic Behavior, 2006

A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We compare the outcome of a signalling game in which the seller runs the auction himself and a screening game in which a monopoly broker chooses the trading mechanism. In the former case, we characterize the equilibria of the resulting signalling game and show that they lead to reduced levels of sale compared to the symmetric information situation. We compare the unique separating equilibrium with the outcome that would be chosen by the monopoly broker. The ex-ante expected probability of trade may be larger with a monopoly broker, as well as the ex-ante total expected surplus.

Hypothetical Bias in Private Value Auctions with Costly Information Acquisition*

2005

A number of recent papers in environmental economics have focused on the process of researching preferences – agents are uncertain about preferences but at a cost may narrow their uncertainty. This issue has arisen in formulating bids in contingent valuation as well as the debate over the divergence between WTP and WTA. In the context of contingent valuation, it has been hypothesized that the hypothetical nature of the preference elicitation biases responses. This paper provides both a theoretical model and experimental evidence to contribute to this debate. The model consists of a series of auctions where subjects compete for an object with private but unknown value – the Risk Neutral Rational Expectations model. The information regarding the value of the object is costly. Furthermore, at the end of the auction, a random number is drawn to determine if the whole process is hypothetical or not. The experiment tests this theoretical model of bidding equilibrium and analyzes the effec...

Information acquisition in auctions: Sealed bids vs. open bids

Games and Economic Behavior, 2009

This paper studies the incentives of a bidder to acquire information in an auction when her information acquisition decision is observed by the other bidders before they bid. Our results show that the incentives are stronger in a sealed bid (second price) auction than in an open (English) auction when the information acquired refers to a common component of the value. However, the ranking is the opposite when the information acquired refers to a private component of the value, at least for a large number of bidders. Our results seem to be due to differences on the strength of the winner's curse, although a more careful analysis show that the key force is rather the loser's curse.

Optimal Two-stage Auctions with Costly Information Acquisition ¤

2013

We consider a two-stage auction environment with costly entry wherein the cost mainly stems from information acquisition. Bidders are endowed with original estimates (“types”) about their private values, and can further learn their true values of the object for sale by incurring an entry cost. We show that optimality of the generalized Myerson allocation rule is robust to this sequential screening setting with costly entry. Optimal entry is thus to admit the set of bidders that maximizes expected virtual surplus adjusted by both the second-stage signal and entry cost. We also show that the optimal mechanism can be implemented via a two-stage auction that is essentially a handicap auction augmented with an entry mechanism.

Manipulating Information Providers Access to Information in Auctions

Lecture Notes in Computer Science, 2014

Information purchasing is a crucial issue that auctioneers have to consider when running auctions, in particular in auction settings where the auctioned item's value is affected by a common value element. In such settings it is reasonable to assume the existence of a self-interested information provider. The main contribution of the information provider may be the elimination of some uncertainty associated with the common value of the auctioned item. The existence of an information provider does not necessarily impose the use of its services. Moreover, in cases in which the auctioneer decides to purchase information, it is not always beneficial for him to disclose it. In this work, we focus on environment settings where the information that may purchased still involves some uncertainty. The equilibrium analysis is provided with illustrations that highlight some non-intuitive behaviors. In particular, we show that in some cases it is beneficial for the auctioneer to initially limit the level of detail and precision of the information he may purchase. This can be achieved, for example, by limiting the information provider's access to some of the data required to determine the exact common value. This result is non-intuitive especially in light of the fact that the auctioneer is the one who decides whether or not to use the services of the information provider; hence having the option to purchase better information may seem advantageous.