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.

Auctions, Financial externalities, Reserve price
dx.doi.org/10.1007/s00199-006-0119-1, hdl.handle.net/1765/63954
Economic Theory
Erasmus School of Economics

Maasland, E, & Onderstal, S. (2007). Auctions with financial externalities. Economic Theory, 32(3), 551–574. doi:10.1007/s00199-006-0119-1