Economic Theory

, Volume 32, Issue 3, pp 551–574 | Cite as

Auctions with Financial Externalities

Research Article

Abstract

We study auctions with financial externalities, i.e., auctions in which losers care about how much the winner pays. In the first-price auction, larger financial externalities result in a lower expected price; in the second-price auction, the effect is ambiguous. Although the expected price in the second-price auction may increase if financial externalities increase, the seller is not able to gain more revenue by guaranteeing the losers a fraction of the auction revenue. With a reserve price, we find that both auctions may have pooling at the reserve price. This finding suggests that identical bids need not be a signal of collusion, in contrast to what is sometimes argued in anti-trust cases.

Keywords

Auctions Financial externalities Reserve price 

JEL Classification Numbers

C72 D44 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.Erasmus University RotterdamRotterdamThe Netherlands
  2. 2.Economics DepartmentUniversity of AmsterdamAmsterdamThe Netherlands

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