Private Disclosures in Competing Mechanisms: Theory and Applications

Northwestern University, Evanston IL

Investigators

Abstract

This research studies a broad class of economic situations in which multiple designers compete by offering sophisticated mechanisms to attract and serve multiple privately-informed agents. Examples include sellers designing auctions to attract bidders, platforms designing payment schemes to attract users and developers, local governments designing taxes and subsidies to attract companies to their municipalities, and stock exchanges designing trading protocols and payment schemes to attract buyers and sellers to their venues. The research explores a novel dimension in the design of mechanisms in these environments, namely the possibility to inform the relevant agents asymmetrically about the functioning of a mechanism. For example, auctioneers may disclose their reserve price to some bidders while keeping it secret from others, a practice that some vendors have started following in recent years but whose merits have not been investigated yet. Alternatively, manufacturers may raise their profits approaching the collusive outcome by informing common retailers asymmetrically of how their production responds to market conditions. The research develops a new methodology to study these markets and uses it for positive and normative analysis. On the positive front, it investigates the limits to competition in markets where contracting is decentralized and sophisticated mechanisms are used. On the normative front, the analysis sheds light on the merits of existing regulations such as mandatory disclosure laws, exclusivity, transparency, and “meet the competition” requirements, and investigates the welfare implications of novel policy interventions. The methodology and results are expected to be of interest to economists, computer scientists, and regulatory authorities. Private disclosures (that is, information about elements of a mechanism disclosed asymmetrically to the agents before the latter act in a mechanism) is a new dimension in the theory of mechanism design. It has profound effects on equilibrium outcomes. For example, allocations and payoffs that can be sustained in equilibrium when the designers are restricted to standard mechanisms with arbitrarily rich message spaces but no private disclosures may not be robust, that is, may not be sustainable when designers can engage in private disclosures. Furthermore, allocations and payoffs that cannot be sustained in equilibrium with standard mechanisms can be sustained when private disclosures are allowed. These results call for a novel approach to the study of competition in mechanisms that is developed under this grant. The research involves two fronts. On the theoretical front, the analysis develops a new approach to the characterization of equilibrium allocations in these games. It identifies a class of tractable mechanisms that is “canonical” in that it supports all equilibrium outcomes. On the applied front, the research shows how private disclosures can be concretely used in many markets of interest and how regulatory authorities should reconsider certain policy interventions in such markets when accounting for private disclosures. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.