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Auction and the Informed Seller Problem

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informedseller.dvi Auction and the Informed Seller Problem∗ B. Jullien† T. Mariotti‡§ August 2002 revised October 2004 Abstract A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We compare the outcome of a signalling game in which the seller runs the auction himself and a screening game in which a monopoly broker chooses the trading mechanism. In the former case, we characterize the equilibria of the resulting signalling game and show that they lead to reduced levels of sale compared to the symmetric information situation. We compare the unique separating equilibrium with the outcome that would be chosen by the monopoly broker. The ex-ante expected probability of trade may be larger with a monopoly broker, as well as the ex-ante total expected surplus. ∗We wish to thank Bruno Biais, Bernard Caillaud, David Martimort, Benny Moldovanu and Jean-Charles Rochet, as well as seminar participants at the universities of Bristol, Paris I, Salerno and Toulouse for insightful discussions. We are also grateful to two anonymous referees and an associate editor for helpful comments and suggestions. †GREMAQ—IDEI, Universite´ de Toulouse I, 21 Alle´e de Brienne, 31000 Toulouse, France. ‡GREMAQ—IDEI, Universite´ de Toulouse I, 21 Alle´e de Brienne, 31000 Toulouse, France. §Corresponding author. E-mail addresses: [email protected] (B. Jullien), [email protected] (T. Mariotti). 1. Introduction In this paper, we consider an auction market subject to a lemon problem (Akerlof, 1970). We derive the equilibrium outcome of a decentralized market structure, and compare it with the outcome of a trading process centralized by a monopoly broker. The lemon problem arises because the seller, who designs the auction in the decentralized structure, has access to some non-verifiable information relevant to buyers. This results in an informed prin

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