Econometrica: Nov 1988, Volume 56, Issue 6

Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions

https://doi.org/0012-9682(198811)56:6<1247:FEOTSI>2.0.CO;2-P
p. 1247-1257

Jacques Cremer, Richard P. McLean

We consider auctions for a single indivisible object, in the case where the bidders have information about each other which is not available to the seller. We show that the seller can use this information to his own benefit, and we completely characterize the environments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder's willingness to pay. We provide this characterization for auctions in which the bidders have dominant strategies, and for those where the relevant equilibrium concept is Bayesian Nash. In both set-ups, the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties.

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