Bidding to lose? Auctions with resale

Authors

Errata

This article is corrected by:

  1. Errata: Erratum Volume 40, Issue 3, 596, Article first published online: 21 July 2009
  2. Errata: Erratum Volume 39, Issue 1, 327, Article first published online: March 2008

  • I am extremely grateful for comments and discussions to Francesca Cornelli, Anna De Simone, Ian Gale, Evelyn Goh, Ian Jewitt, Margaret Meyer, David Myatt, Alessandro Petretto, and, especially, Paul Klemperer. I thank Joe Harrington and two anonymous referees for suggestions that greatly helped me to improve the article, as well as seminar participants at Nuffield College, Oxford, Salerno, the 2004 EARIE Conference, the Stony Brook Workshop on “Mechanism Design with Budget Constraints,” the 2005 EEA Congress, and the 2006 SIEP Conference. Financial support by MIUR (grant 2004134814_003) is gratefully acknowledged.

Abstract

A losing bidder can still purchase the prize from the winner after the auction. We show why a strong bidder may prefer to drop out of the auction before the price has reached her valuation and acquire the prize in the aftermarket: a strong bidder may be in a better bargaining position in the aftermarket if her rival won at a relatively low price. So it can be common knowledge that, in equilibrium, a weak bidder will win the auction and, even without uncertainty about relative valuations, resale will take place. The possibility of reselling to a strong bidder attracts weak bidders to participate in the auction and raises the seller's revenue.

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