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Durham University

Research & business

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Publication details

Zhiyun Li, D. (2012). Seller cheap talk in almost common-value auctions. B.E. Journal of Theoretical Economics 12(1): 8.

Author(s) from Durham

Abstract

We study seller cheap talk problem in a modified almost common value auction, where there are potential entrants who need to pay entry costs for entering the auction. In almost common value auctions, a seller suffers great revenue losses due to the aggravated winner's curse problem. In our modified model, the inside bidders are more sensitive to the signals sent by the seller, and by revealing the information about the object valuation, the seller faces the trade-off between the benefit of increased competition and that of higher bids by weak inside bidders. For instance, a low message will attract the potential entrants into the auction, as a result of greater winning opportunity, and a high message will encourage the weak since bidders to bid more aggressively, as a result of increased valuation. Under quite plausible conditions, there exists an informative equilibrium in this cheap talk game, which will either increase the expected revenue of the auction, or the efficiency of final allocation.