Auction Design with Resale

Northwestern University, Evanston IL

Investigators

Abstract

Auctions are widely used mechanisms for the allocation of resources, and resale after auctions is a practical possibility. However, this possibility is usually not considered in auction theory. This project is to re-examine auction theory when resale among bidders is possible. The project is based on two preliminary results obtained by the investigator: (a) with the possibility of resale, the optimal auction in the literature may fail to be optimal; (b) the investigator has designed a new mechanism that achieves optimality despite resale. The project consists of three parts. First, develop a general method to characterize incentive-feasible mechanisms when resale is possible. Second, analyze the impact of resale on multiple-object auctions, with the FCC radio frequencies spectrum auctions constituting the motivating example. Third, examine the relationship between the formation of middlemen and the pricing scheme in multiunit auctions, with the Treasury-bill auctions constituting the motivating example. The project will help to provide a better understanding about auctions, especially on their relation with resale and other re-contracting activities. Such better understanding has the potential of providing policy implications for major privatization auctions. Theoretically, the project will help to extend the framework of mechanism design beyond static isolated environments. Such extension will make the framework more applicable to industrial organization, market design, and political economy. More broadly speaking, auction theory has produced explicit predictions on how commodities change hands and hence the theory is a building block for a future precise science of markets. Extending the theory to the more realistic resale settings, this project will enhance the knowledge of how competitive markets actually operate.