Working Paper No. 06-03
Matching in Auctions with an Uninformed Seller
In many auctions, matching between the bidder and seller raises the value of the contract for both parties although information about the matching may be incomplete. We consider the case in which each bidder observes the quality of his match with the seller but the seller does not observe the quality of the matches. Our objective is to determine whether it is in the seller's interest to (1) account for matching in his allocation decision and (2) observe the matches prior to the auction.
It is shown that irrespective of how important matching may be to the seller, the optimal mechanism can be implemented without using matching as a factor. If the seller has commitment power, he can raise his expected utility further by observing the matches ex ante. However, if the seller cannot commit, his value for the information may be negative: the seller's knowledge of the matches generates an asymmetry across bidders which depresses bids. The more matching matters, the greater the penalty associated with observing the matches in advance.
JEL classification: C72; C78; D44; D82
Keywords: Asymmetries; Auctions; Auction Theory; Bidding; Information Revelation; Matching; Mechanism Design; Signaling