Ram Orzach

Dominant strategies, superior information, and winner's curse in second-price auctions

Abstract. In a general model of common-value second-price auctions with differential information, we show equivalence between the following characteristics of a bidder: (i) having a dominant strategy; (ii) possessing superior information; (iii) being immune from winners curse. When a dominant strategy exists, it is given by the conditional expectation of the common value with respect to bidders information field; if the dominant strategy is used, other bidders cannot make a profit.

Dominance solvability of second-price auctions with differential information

We study a class of common-value second-price auctions with differential information. This class of common-value auctions is characterized by the property that each players information set is connected with respect to the common value. We showthat the entire class is dominance solvable, and that there is a natural single-valued selection from the resulting set of sophisticated equilibria. Additionally, it is shown that bidders information advantage over others is rewarded in sophisticated equilibria.

Equilibrium and revenue in a family of common-value first-price auctions with differential information

We study a discrete common-value auction environment with two asymmetrically informed bidders. Equilibrium of the first-price auction is in mixed strategies, which we characterize using a doubly recursive solution method. The distribution of bids for the ex post strong player stochastically dominates that for the ex post weak player. This result complements Maskin and Riley’s (Rev Econ Stud 67:413–438, 2000) similar result for asymmetric private-value auctions. Finally, comparison with the dominance-solvable equilibrium in a second-price auction shows the Milgrom–Weber (Econometrica 50:1089–1122, 1982a) finding that the second-price auction yields at least as much revenue as the first-price auction fails with asymmetry: in some cases the first-price auction provides greater expected revenue, in some cases less.

Common-Value All-Pay Auctions with Asymmetric Information and Bid Caps

We study a class of two-player common-value all-pay auctions (contests) with asymmetric information under the assumption that one of the players has an information advantage over his opponent and both players are budget-constrained. We extend the results for all-pay auctions with complete information, and show that in our class of all-pay auctions with asymmetric information, sufficiently high (but still binding) bid caps do not change the players’ expected total effort compared to the benchmark auction without any bid cap. Furthermore, we show that there are bid caps that increase the players’ expected total effort compared to the benchmark. Finally, we demonstrate that there are bid caps which may have an unanticipated effect on the players’ expected payoffs—one player’s information advantage may turn into a disadvantage as far as his equilibrium payoff is concerned.

Supersizing: The Illusion of a Bargain and the Right-to-Split

The supersizing phenomenon where menu prices for large fast food portions appear to be well below their marginal production costs is of considerable scholarly and policy interest. This article develops sufficient conditions under which a firm can separate two different consumer types while maximizing and capturing the total surplus associated with marginal-cost pricing. This strategy creates a perceived supersizing discount even though the firm does not actually sell the additional quantity below marginal cost. With public health interest in reducing portion sizes, we introduce the right-to-split as a policy alternative that breaks the separating equilibrium and leads to smaller quantities.

Equilibrium in a Family of Common-Value First-Price Auctions with Differential Information

Equilibrium strategies are explicitly derived for a family of two-bidder common-value first-price auctions in which players have ex ante different information represented by finite partitions of the set of possible values for the object being sold. The distribution of bids for the ex post strong player stochastically dominates that for the ex post weak player. Comparison with the dominance-solvable equilibrium in a second-price auction shows the Milgrom-Weber finding that the second-price auction yields at least as much revenue as the first-price auction fails with asymmetry: in some cases the first-price auction provides greater expected revenue, in some cases less.