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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Cervellati, Matteo / Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier

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Seller Cheap Talk in Almost Common Value Auction

Daniel Zhiyun LI1

1Durham Business School, Durham University

Citation Information: The B.E. Journal of Theoretical Economics. Volume 12, Issue 1, ISSN (Online) 1935-1704, DOI: 10.1515/1935-1704.1709, March 2012

Publication History

Published Online:
2012-03-16

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.

Keywords: cheap talk; almost common value auction; informative equilibrium; expected revenue; Pareto dominance

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