Econometrica: Sep 2015, Volume 83, Issue 5

Efficient Competition through Cheap Talk: The Case of Competing Auctions

https://doi.org/10.3982/ECTA12103
p. 1849-1875

Kyungmin Kim, Philipp Kircher

We consider a large market where auctioneers with private reservation values compete for bidders by announcing cheap‐talk messages. If auctioneers run efficient first‐price auctions, then there always exists an equilibrium in which each auctioneer truthfully reveals her type. The equilibrium is constrained efficient, assigning more bidders to auctioneers with larger gains from trade. The choice of the trading mechanism is crucial for the result. Most notably, the use of second‐price auctions (equivalently, ex post bidding) leads to the nonexistence of any informative equilibrium. We examine the robustness of our finding in various dimensions, including finite markets and equilibrium selection.

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Supplemental Material

Supplement to "Efficient Competition through Cheap Talk: The Case of Competing Auctions"

Appendix A provides a formal analysis of the finite market model introduced in Section 4.  Appendix B considers a finite competing (procurement) auctions model with reserve price posting and show that the market outcome is not constrained efficient whenever there are at least three procurers and at least two of them are heterogeneous. Appendix C constructs the set of all interval partitional equilibria, which includes the fully revealing equilibrium as a special case.  Then it shows that the fully revealing equilibrium uniquely satisfies neologism proofness by Farrell (1993).  Appendix D shows that the fully revealing equilibrium exists even if agents are risk averse. Appendix E demonstrates that our main result continues to hold even when contractors are heterogeneous. 
 

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