Ignorance Promotes Competition: An Auction Model with Endogenous Private Valuations

Abstract

We study a situation in which an auctioneer wishes to sell an object to one of N risk-neutral bidders with heterogeneous preferences. The auctioneer does not know bidders' preferences but has private information about the characteristics of the object, and must decide how much information to reveal prior to the auction. We show that the auctioneer has incentives to release less information than would be e±cient and that the amount of information released increases with the level of competition (as measured by the number of bidders). Furthermore, in a perfectly competitive market the auctioneer would provide the e±cient level of information.

Discriminatory Information Disclosure

“…2 See also Lewis and Sappington (1994), Che (1996), and Ganuza (2004). Johnson and Myatt's (2006) model of choosing demand functions and Kamenica and Gentzkow's (2011) model of persuasion also have the similar idea of disclosing information: in these models the sender of the information does not need to elicit it from the receiver, so one might as well assume the sender does not observe it.…”

Ranking Disclosure Policies in All‐pay Auctions

“…Hurley and Shogren () compare prize allocation efficiency across different information structures in Tullock contests. Ganuza () studies a revenue‐maximizing auctioneer's incentive to release information about the object's characteristics to bidders, who refine their private valuations. He finds that the auctioneer is motivated to release less information than would be efficient, and the amount of information revealed increases with the level of competition.…”

Online advertising and privacy

“…Indeed, in that case, the rent left to the winning bidder vanishes. However, and in contrast to Ganuza (), such a policy is not necessarily efficient: some consumers are excluded from the market following the increase in the equilibrium price of the goods. Following the approach of Cowan (), we give conditions under which privacy or disclosure is optimal when the quality of the match determines a vertical shift of the demand function.…”

“…From a positive point of view, one would like to know under which conditions the platform is likely to adopt a disclosure policy. As in Ganuza (), the main trade‐off for the platform is between efficiency (increasing the industry's profit through disclosure) and rent‐extraction. However, given that the product price is endogenous to the disclosure policy, the analysis is more intricate.…”

“…Regarding our second question, namely, whether the platform provides the right amount of information from a social welfare perspective, our analysis partially relies on insights formulated by Ganuza () and Ganuza and Penalva (). As in those articles, disclosing information increases the total profits of the industry (platform and advertisers) but comes at the price, for the platform, of leaving an informational rent to the winning bidder.…”