Optimal Mechanism Design with Aftermarket Oligopoly Competitions

Abstract

This paper examines the optimal selling mechanism in a primary market when the privately informed winning buyer needs to engage in an oligopoly competition with a third-party afterwards. While the designer has full power in determining the mechanism in the primary market, she cannot choose the outcome for the competition directly. As a result, one important and non-conventional instrument for the designer is to determine the optimal information structure in the aftermarket. We find that in the optimal direct mechanism the designer ranks the buyers according to their virtual costs. More importantly, the optimal information structure in the aftermarket depends on the nature of competition. With Cournot competition, it is optimal to fully reveal the winning buyer's reported type to the third-party. This leads to important implications for implementing the optimal mechanism via auctions in practice: while first-price auctions with a reserve price and the announcement of the winning bid can implement the optimal mechanism, English auctions can never be optimal. With Bertrant competition, full information is the worst. When the distribution of the buyer follows power function, no information is optimal.

About the presenter's visit

A/Prof Jun Zhang will be visiting the School of Economics on 8^th November 2019. While here he will be using room 520A Colin Clark Building. If you would like to meet with him or have lunch or dinner with him please contact Dr Zachary Breig who will be his host while at The University of Queensland. Dr Breig can be contacted on z.breig@uq.edu.au.