Journal Article

Optimal Information Disclosure in Auctions and the Handicap Auction

Péter Eső and Balázs Szentes

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 3, pages 705-731
Published in print July 2007 | ISSN: 0034-6527
Published online July 2007 | e-ISSN: 1467-937X | DOI:
Optimal Information Disclosure in Auctions and the Handicap Auction

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We analyse a situation where a monopolist is selling an indivisible good to risk-neutral buyers who only have an estimate of their private valuations. The seller can release, without observing, certain additional signals that affect the buyers' valuations. Our main result is that in the expected revenue-maximizing mechanism, the seller makes available all the information that she can, and her expected revenue is the same as it would be if she could observe the part of the information that is “new” to the buyers. We also show that this mechanism can be implemented by what we call a handicap auction in interesting applications. In the first round of this auction, each buyer picks a price premium from a menu offered by the seller (a smaller premium costs more). Then the seller releases the additional signals. In the second round, the buyers bid in a second-price auction where the winner pays the sum of his premium and the second highest non-negative bid. In the case of a single buyer, this mechanism simplifies to a menu of European call options.

Keywords: D42; D44

Journal Article.  13758 words.  Illustrated.

Subjects: Market Structure and Pricing

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