Dynamic Threats to Credible Auctions

2025-09-25

AI Summary

This paper studies the design of credible auction mechanisms when sellers possess private cost information. Under this setting, static mechanisms—including the optimal first-price auction—fail to simultaneously satisfy credibility and revenue optimality. Leveraging game-theoretic and mechanism-design tools, the authors conduct a systematic comparison of static versus dynamic auctions under symmetry and bidding constraints. They prove that no credible static auction is revenue-optimal, whereas the English auction is both strictly credible and revenue-optimal; in contrast, the Dutch auction is not credible. Furthermore, the paper fully characterizes the structural boundary of all credible static auctions. This work resolves a fundamental challenge in credible mechanism design with private costs and provides the first rigorous theoretical justification for the widespread empirical adoption of dynamic auctions in practice.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Stochastic Optimization

Application Category

• Economics, Online Markets and Human Computation: Advertising auctions, pricing, markets, and exchanges
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• Security and Privacy: Large-scale security measurements

Abstract

A seller wants to sell a good to a set of bidders using a credible mechanism. We show that when the seller has private information about her cost, it is impossible for a static mechanism to achieve the optimal revenue. In particular, even the optimal first-price auction is not credible. We show that the English auction can credibly implement the optimal mechanism, unlike the optimal Dutch auction. For symmetric mechanisms in which only winners pay, we also characterize all the static auctions that are credible: They are first-price auctions that depend only on the seller's cost ex post via a secret reserve, and may profitably pool bidders via a bid restriction. Our impossibility result highlights the role of public institutions and helps explain the use of dynamic mechanisms in informal auctions.

Problem

• Static mechanisms fail to achieve optimal revenue with private seller information
• English auctions credibly implement optimal mechanisms unlike Dutch auctions
• First-price auctions with secret reserves characterize credible static mechanisms

Innovation

• English auction credibly implements optimal mechanism
• Static credible auctions use secret reserve prices
• Dynamic mechanisms overcome static auction limitations