The Behavioral and Experimental Economics group has an influential position in this field in the Netherlands and Europe. CREED, the Amsterdam-based group, focuses particularly on three main projects: economics of political decision making; bounded rationality and institutions and experimental economics. The research of the Rotterdam-based group focuses on two broad themes: decision under risk and uncertainty and intertemporal choice.
- J. Albrecht, P.A. Gautier, S. Vroman
- The American Economic Review 2014, 104(10), 3288–3296
In this paper, we consider the efficiency of seller entry into a large market in which sellers post and commit to terms of trade and buyers then allocate themselves across sellers. Buyers differ in their valuations for the good being sold in this market, and sellers are heterogeneous with respect to their reservation values. In this environment, a second-price auction is a simple mechanism which allows the buyers who interact with a particular seller to compete for that seller’s good. The competing auctions literature (e.g., McAfee 1993 and Peters and Severinov 1997) considers the characteristics of these auctions as the market gets large, and it is now well understood that competition leads each seller to post an efficient mechanism, e.g., a second-price auction with reserve price equal to seller reservation value.
The implications of a large market for seller entry are less well understood in this environment. When goods are auctioned, buyers extract an information rent from sellers. One might therefore expect that the equilibrium level of seller entry into the market would be below the level that a social planner would choose. There is, however, a counterbalancing force, namely, that when a seller enters the market, that seller “steals” buyers from the sellers who were already there and so potentially reduces the surpluses associated with these sellers. Our main result is that in a large market when sellers are free to choose their preferred mechanisms, these two effects—information rent versus business stealing—exactly offset each other, leading to the socially efficient level of seller entry. In addition, we show that the equilibrium and social planner allocation of buyers across seller types coincide.
The model we present is one of competitive search. Sellers compete for buyers by posting and committing to selling mechanisms, and buyers direct their search based on these posted mechanisms. Moen (1997) and Shimer (1996) demonstrate the efficiency of entry in a model of competitive search that has two special features. First, meetings between buyers and sellers are one-on-one; that is, each seller interacts with at most one buyer. Second, there is complete information in the sense that once a buyer and seller meet, private information is not an issue. We generalize this literature on efficient entry in competitive search in two directions. First, we allow for nonrival (many-on-one) meetings; that is, the fact that one or more buyers choose to visit a seller does not make it more difficult for any other buyer to visit that seller.
Second, we allow for private information, which we model by assuming that sellers do not know how much the buyers at their auctions value the good. With a one-on-one meeting technology and complete information, the only relevant mechanism
for selling a good is price posting. With many-on-one meetings and asymmetric information, second-price auctions rather than wage posting constitute an optimal mechanism. Thus, we have a model of competing auctions.
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