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**Paul R. Milgrom; Robert J. Weber
**

Econometrica, Vol. 50, No. 5. (Sep., 1982), pp. 1089-1122.

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Fri Oct 19 16:22:29 2007

ECONOMETRICA

A THEORY OF AUCTIONS AND COMPETITIVE BIDDING'

**A model of competitive bidding is developed in which the winning bidder's payoff may
**

depend upon his personal preferences, the preferences of others, and the intrinsic qualities

of the object being sold. In this model, the English (ascending) auction generates higher

average prices than does the second-price auction. Also, when bidders are risk-neutral, the

second-price auction generates higher average prices than the Dutch and first-price

auctions. In all of these auctions, the seller can raise the expected price by adopting a

policy of providing expert appraisals of the quality of the objects he sells.

1. INTRODUCTION

**THEDESIGN AND CONDUCT of auctioning institutions has occupied the attention
**

of many people over thousands of years. One of the earliest reports of an auction

was given by the Greek historian Herodotus, who described the sale of women to

be wives in Babylonia around the fifth century B.C. During the closing years of

the Roman Empire, the auction of plundered booty was common. In China, the

personal belongings of deceased Buddhist monks were sold at auction as early as

the seventh century A . D . ~

In the United States in the 1980's, auctions account for an enormous volume

of economic activity. Every week, the U.S. Treasury sells billions of dollars of

bills and notes using a sealed-bid auction. The Department of the Interior sells

mineral rights on federally-owned properties at a ~ c t i o nThroughout

.~

the public

and private sectors, purchasing agents solicit delivery-price offers of products

ranging from office supplies to specialized mining equipment; sellers auction

antiques and artwork, flowers and livestock, publishing rights and timber. rights,

stamps and wine.

The large volume of transactions arranged using auctions leads one to wonder

what accounts for the popularity of such common auction forms as the English

, ~ first-price sealed-bid a ~ c t i o n and

a ~ c t i o n the

, ~ Dutch a ~ c t i o n the

, ~ the second'This work was partially supported by the Center for Advanced Studies in Managerial Economics

at Northwestern University, National Science Foundation Grant SES-8001932, Office of Naval

Research Grants ONR-N00-14-79-C-0685 and ONR-N000-14-77-C-0518, and by National Science

Foundation Grant SOC77-06000-A1 at the Institute for Mathematical Studies in the Social Sciences,

Stanford University. We thank the referees for their helpful comments.

2These and other historical references can be found in Cassady [2].

3 0 n September 30, 1980, U.S. oil companies paid $2.8 billion for drilling rights on 147 tracts in the

Gulf of Mexico. The three most expensive individual tracts brought prices of $165 million, $162

million, and $121 million respectively.

4 ~ h English

e

(ascending, progressive, open, oral) auction is an auction with many variants, some

of which are described in Section 5. In the variant we study, the auctioneer calls successively higher

prices until only one willing bidder remains, and the number of active bidders is publicly known at all

times.

5 ~ h Dutch

e

(descending) auction, which has been used to sell flowers for export in Holland, is

conducted by an auctioneer who initially calls for a very high price and then continuously lowers the

price until some bidder stops the auction and claims the flowers for that price.

1090

P. R. MILGROM AND R. J. WEBER

**price sealed-bid auction.' What determines which form will (or should) be used
**

in any particular circumstance?

Equally important, but less thoroughly explored, are questions about the

relationship between auction theory and traditional competitive theory. One may

ask: Do the prices which arise from the common auction forms resemble

competitive prices? Do they approach competitive prices when there are many

buyers and sellers? In the case of sales of such things as securities, mineral rights,

and timber rights, where the bidders may differ in their knowledge about the

intrinsic qualities of the object being sold, do prices aggregate the diverse bits of

information available to the many bidders (as they do in some rational expectations market equilibrium models)?

In Section 2, we review some important results of the received auction theory,

introduce a new general auction model, and summarize the results of our

analysis. Section 3 contains a formal statement of our model, and develops the

properties of "affiliated" random variables. The various theorems are presented

in Sections 4-8. In Section 9, we offer our views on the current state of auction

theory. Following Section 9 is a technical appendix dealing with affiliated

random variables.

2. AN OVERVIEW OF THE RECEIVED THEORY AND NEW RESULTS8

**2.1. The Independent Private Values Model
**

Much of the existing literature on auction theory analyzes the independent

private values model. In that model, a single indivisible object is to be sold to one

of several bidders. Each bidder is risk-neutral and knows the value of the object

to himself, but does not know the value of the object to the other bidders (this is

the private values assumption). The values are modeled as being independently

drawn from some continuous distribution. Bidders are assumed to behave

competitively;9 therefore, the auction is treated as a noncooperative game among

the bidders."

At least seven important conclusions emerge from the model. The first of these

is that the Dutch auction and the first-price auction are strategically equivalent.

6The first-price auction is a sealed-bid auction in which the buyer making the highest bid claims

the object and pays the amount he has bid.

h he second-price auction is a sealed-bid auction in which the buyer making the highest bid

claims the object, but pays only the amount of the second highest bid. This arrangement does not

necessarily entail any loss of revenue for the seller, because the buyers in this auction will generally

place higher bids than they would in the first-price auction.

8~ more thorough survey of the literature is given by Engelbrecht-Wiggans [4]. A comprehensive

bibliography of bidding, including almost 500 titles, has been compiled by Stark and Rothkopf [26].

'Situations in which bidders collude have received no attention in theoretical studies, despite

many allegations of collusion, particularly in bidding for timber rights (Mead [14]).

'OThe case in which several identical objects are offered for sale with a limit of one item per bidder

has also been analyzed (Ortega-Reichert [22], Vickrey [30]). All of the results discussed below have

natural analogues in that more general setting.

Another variation, in which the bidders' private valuations are drawn from a common but

unknown distribution, has been treated by Wilson [34].

An insight due to Vickrey [29] is that the decision faced by a bidder with a particular valuation is essentially static. in both the English and second-price auctions. This. Similarly.e. for each of his possible valuations. "In contrast. at equilibrium. the auctioneer begins by naming a very high price and then lowers it continuously until some bidder stops the auction cnd claims the object for that price.THEORY OF AUCTIONS 1091 Recall that in a Dutch auction. Thus. i. Thus. which is to bid actively until the price reaches the value of the object to him. Consequently. the argument concerning the strategic equivalence of the Dutch and first-price auctions does not require any assumptions about the values to the bidders of various outcomes. Regardless of the strategies adopted by the other bidders. whether he will be active at any given price level. In particular. In symmetric models the Dutch and first-price auctions also lead to Pareto optimal allocations. a bidder's strategy must specify. then this equivalence result generally does not apply. or if it is a work of art. the equilibria of the two auction games must coincide. and the price he pays will be equal to that amount." If what is being sold is the right to extract minerals from a property. the two auctions are equivalent. that is. the winner wili be the bidder who values the object most highly. In this setting. . if a bidder knows the value of the object to himself. there is a unique dominant-strategy equilibrium. The winning bidder will be the one who chooses the highest level. the bidder must choose the price level at which he will claim the object if it has not yet been claimed. Note that this argument requires that each bidder know the value of the object to himself. of course. as a function of the previous activity he has observed during the course of the auction. the auctioneer begins by soliciting bids at a low price level. does not depend on the symmetry of the model. Recall that in an English auction. then his dominant strategy is to submit a sealed bid equal to that value. and he then gradually raises the price until only one willing bidder remains. This conclusion follows immediately from the argument of the preceding paragraph and. is also the way the winner and price are determined in the sealed-bid first-price auction. it does not require that a bidder know the value of the object to himself. this simple strategy will be an optimal reply. However. the winner is the bidder who values the object most highly. where the amount of recoverable minerals is unknown. like the first two results. the sets of strategies and the mapping from strategies to outcomes are the same for both auction forms. In both auctions. if a bidder knows the value of the object to himself. which will be enjoyed by the buyer and then eventually resold for some currently undetermined price. A third result is that the outcome (at the dominant-strategy equilibrium) of the English and second-price auctions is Pareto optimal. and the price he pays will be the value of the object to the bidder who values it second-most highly. In that sense. The second conclusion is that-in the context of the private values model-the second-price sealed-bid auction and the English auction are equivalent. although in a weaker sense than the "strategic equivalence" of the Dutch and first-price auctions. he has a straightforward dominant strategy. in the second-price auction.

when the indifference line has multiple points of tangency. e(p)) pairs among which he must choose. However. Riley and Samuelson [24]). It then follows that the seller's expected revenue from a bidder depends on the rules of the auction only to the extent that the rules affect either e(p*(O)) or thep* function. That observation. J. Figure 1 displays a typical bidding decision faced by a bidder who values the prize at v. Vickrey [30]). e(p))-curve need not be continuous. . the ( p . It is clear from the figure that p * must be nondecreasing. that all auctions which always deliver the prize to the highest evaluator have the same p * function for all bidders. Let p*(v) denote the optimal choice of p for a bidder with valuation v. Hence we can conclude quite generally that e(p*(v)) = e(p*(O)) + J. WEBER O P*(v) I Probability of Winning A fourth result is that in the independent private values model. (We take e(p) to be the lowest expected payment associated with an action which obtains the object with probability p. because of the independence assumption. when an application of the self-selection approach cast it in a new light (Harris and Raviv [S]. e(p)) pairs that are available to the bidder depends only on the rules of the auction and the strategies of the others.) It is important to notice that. The quantity e(0) will be negative only if the seller at times provides subsidies to losing bidders. This result remained a puzzle until recently. in particular. Ap* in e(p*(v)).e. e) is v . p . his indifference curves are straight lines with slope v. the tangency condition is e'(p*(v)) = v. there will always be a point (0.I2 Since the bidder's expected utility from a point (p. and not on his private valuation of the object. Notice. That approach views a bidder's decision problem (when the strategies of the other bidders are fixed) as one of choosing.t dp*(t). Similarly. In Figure 1.P. all four auction forms lead to identical expected revenues for the seller (Ortega-Reichert [22]. the set of (p. a probability p of winning and a corresponding expected payment e(p). for the bidder is free to abstain from participation. e(0)) on the curve. through his action. together with the fact that at the dominant-strategy equilibrium the second-price I2In general. Myerson [21]. The curve consists of the set of (p. there may even be values of p for which no ( p . a small increase in v causes a jump Ap* in p * and a corresponding jump Ae = v . MILGROM AND R. with e(0) 5 0. e(p)) pair is available. R.

Holt [9]. and Mineral Rights The private values assumption is most nearly satisfied in auctions for nondurable consumer goods. It should be noted that Theorem 0 has an attractive economic interpretation. Oil. consider the situation in an auction for mineral rights on a tract of land where the value of the rights depends on the unknown amount of recoverable ore. and may allow that others could value the good differently. the values of these mineral rights to . Dutch.2.). and second-price auctions. its quality. 2. Matthews [13]). its ease of recovery. Maskin and Riley [ll]. At the symmetric equilibria of the English. this is the so-called "revenueequivalence" result. Consequently. first-price. The seventh and last result in this list arises in a variation of the model where either the seller or the buyers are risk averse. In that case. and the prices that will prevail for the processed mineral. In contrast. and that the bidders adopt strategies which consititute a noncooperative equilibrium. the expected selling price is the same for all four mechanisms. leads to the fifth result. The satisfaction derived from consuming such goods is reasonably regarded as a personal matter. Riley and Samuelson [24]). exponential. One remarkable conclusion emerging from the analysis is this: For many common sample distributionsincluding the normal. and that any bidder who values the object at its lowest possible level has an expected payment of zero. Suppose that at equilibrium the bidder who values the object most highly is certain to receive it. so it is plausible that a bidder may know the value of the good to himself. Then the expected revenue generated for the seller by the mechanism is precisely the expected value of the object to the second-highest evaluator. that the THEOREM independent private values model applies. the seller will strictly prefer the Dutch or first-price auction to the English or second-price auction (Harris and Raviv [8]. No matter what competitive mechanism is used to establish the selling price of the object.THEORY OF AUCTIONS 1093 auction yields a price equal to the second-highest valuation. the conditions of the theorem are satisfied. the form of the optimal auction depends on the underlying distribution of bidder valuations. where the control variables are the pairs (p:(. Myerson [21]. The self-selection approach has also been applied to the problem of designing auctions to maximize the seller's expected revenue (Harris and Raviv [8]. on average the sale will be at the lowest price at which supply (a single unit) equals demand. To a first approximation. 0: Assume that a particular auction mechanism is given. Gas. and uniform distributions-the four standard auction forms with suitably chosen reserve' prices or entry fees are optimal auctions. The problem is formulated very generally as a constrained optimal control problem.As might be expected. ei(pT(0))).

Wilson [34]). Wilson [34]). Indeed. known as the winner's curse. Clapp.. Milgrom [15]). MILGROM AND R. Reece [23]. Consequently. however.. the winner will find that he had overestimated (on average) the value of the rights he has won at auction. Since the winning bidder's estimate is the maximum among all the estimates. but bidders may have differing estimates of the common value. Thus. and Campbell [I]) have claimed that this phenomenon.)/ f(x 1 v2) declines as x increases. Rothkopf [25]. It is tempting to think that this price cannot convey more information than was available to the winning bidder. Ortega-Reichert [22]. the winning bid conveys a bound on all the loser's estimates. A property of many one-parameter sampling distributions is that for v. let f(x I v) be the density of the distribution of a bidder's estimate when V = v. Milgrom. since the price is just the amount that he bid. Other things being equal. even if no bidder can estimate V closely from his information alone (Milgrom [15. I3This property is known to statisticians as the monotone likelihood ratio prope. For example. and bidder profits. 161. in the first-price auction a bidder whose information is also available to some other bidder must have zero expected profits at equilibrium (Engelbrecht-Wiggans.ty (Tong [27]). J. is incorrect. the price conveys a bound on many estimates. Suppose the bidders make (conditionally) independent estimates of this common value V. 161. the bidder with the largest estimate will make the highest bid. the price can be surprisingly effective in aggregating private information. if two bidders have access to the same estimate of V and a third bidder has access only to some less informative but independent estimate. Petroleum engineers (Capen. Its usefulness for economic modelling has been elaborated by Milgrom [18]. is responsible for the low profits earned by oil companies on offshore tracts in the 1960's. but the more poorly-informed bidder may have positive expected profits. < v. even if all bidders make unbiased estimates. When there are many bidders. then the equilibrium price in a first-price auction with many bidders is a consistent estimator of the value V. This reasoning. The model described above. consider the information that is reflected in the price resulting from a mineral rights auction. then the two relatively well-informed bidders must have zero expected profits. R. f(x lo. prices. Thus. The equilibrium of the first-price auction for this model has been extensively studied (Maskin and Riley [ll]. Milgrom [15. Milgrom and Weber [20]. can be called the mineral rights model or the common value model. Among the most interesting results for the mineral rights model are those dealing with the relations between information. in which risk-neutral bidders make independent estimates of the common value where the estimates are drawn from a single underlying distribution parameterized by V . . Several results and examples suggest that a bidder's expected profits in a mineral rights auction depend more on the privacy of his information than on its accuracy as information about V. WEBER the various bidders can be regarded as equal. and Weber [5].1094 P. For example. and so can be very informative. Related results appear in Milgrom [15 and 171 and as Theorem 7 of this paper.I3 If this ratio approaches zero.

Only if these assumptions are palatable can the theory be used to guide the seller's choice of an auction procedure. Suppose that the seller has access to a private source of information. Thus. or that a buyer.3. may conclude that other bidders also are likely to value it highly. the received theory offers no basis for choosing among the first-price. and that the values are statistically independent. the model yields several testable predictions. The English auction generates the highest prices followed by the second-price auction and. and (iii) that the authenticity of the painting may be in doubt. just as they were in the private values model. the Dutch and first-price auctions. the common auction forms can be ranked by the expected prices they generate. when bidders are uncertain about their value estimates. one must make two assumptions: that each bidder knows his value for the painting. but offers no role for differences in individual tastes. second-price. the second-price auction generates a higher average price than does the first-price auction. the common value theory allows for statistical dependence among bidders' value estimates. the auction of a painting. A third prediction of the model is that when the bidders' value estimates are statistically dependent. The first assumption rules out the possibilities: (i) that the painting may be resold later for an unknown price. The second assumption rules out the possibility that several bidders may have relevant information concerning the painting's authenticity. for example. (ii) that there may be some "prestige" value in owning a painting which is admired by other bidders. Even in this case. One explanation of this inequality is that when bidders are uncertain about their valuations. Dutch. Among the possible policies are: (i) concealment (never report any . the Dutch and first-price auctions are strategically equivalent in the general model. This may explain the observation that "an estimated 75 per cent. and English auction procedures. however. A General Model Consider the issues that arise in attempting to select an auction to use in selling a painting. First. finally. In this paper. Further. which accounts for the higher expected price. Unlike the private values theory. Despite its generality. That extra information weakens the winner's curse and leads to more aggressive bidding in the English auction. If the independent private values model is to be applied. Second. or even more. little guidance is forthcoming: the theory predicts that the four most common auction forms lead to the same expected price. suppose that he can commit himself to any policy of reporting information that he chooses.THEORY OF AUCTIONS 1095 2. as well as a range of intermediate models which can better represent. of all auctions in the world are conducted on an ascending-bid basis" (Cassady [2. page 661). they can acquire useful information by scrutinizing the bidding behavior of their competitors during the course of an English auction. the English and second-price auctions are not equivalent: the English auction generally leads to larger expected prices. thinking that the painting is particularly fine. we develop a general auction model for risk-neutral bidders which includes as special cases the independent private values model and the common value model. Furthermore.

" that is. When both a reserve price and an entry fee are used. For each type of auction we study. accords well with the qualitative features of the situations we have described. (iv) summarizing (report only a rough summary statistic). it pays to raise entry fees and reduce reserve prices. The seller can offset that effect by adjusting the reserve price (in a manner depending on the particular realization of his information variable) so as to always attract the same set of bidders. In particular. though restrictive. then the auction corresponding to (7. However. e) are two such combinations with e > 2. The most tractable case for analysis arises when the "only if" can be replaced by "if and only if. (ii) maximizes the expected price: Honesty is the best policy. In Section 8. it does change the analysis of information reporting by the seller. MILGROM AND R. when every bidder whose value estimate exceeds the screening level participates: we call that case the regular case. J. The fourth conclusion of our analysis is that for the first-price. R. (ii) honesty (always report all information completely). When this is done. a bidder will participate in the auction if and only if his expected profit from bidding (given the reserve price) exceeds the entry fee. in which bidders are risk-averse. The introduction of a positive reserve price causes the number of bidders actually submitting bids to be random. The case of a zero entry fee is always regular.1096 P. but this does not significantly change the analysis of equilibrium strategies nor does it alter the ranking of the three auction forms as revenue generators. second-price. Therefore. any particular screening level x* can be achieved by a continuum of different combinations (r. and if the auction corresponding to (r. e) is regular. this means that a high value of one bidder's estimate makes high values of the others' estimates more likely. e) of reserve prices and entry fees. and (v) randomizing (add noise to the data before reporting). we consider another variation of the general model. so long as regularity is preserved and the screening level is held fixed. The analysis of the model is driven by the assumption that the bidders' valuations are affiliated. In Section 7.Z) is also regular but generates lower expected revenues than the (r. English. WEBER information). he will participate only if his value estimate exceeds some minimum level called the screening level. and first-price auction procedures. Roughly. The general model and its assumptions are presented in Section 3. We show that if (r. (iii) censoring (report only the most favorable information). the information-release results mentioned above continue to hold. and English auctions policy. we modify the general model by introducing reserve prices and entry fees. e)-auction. e) and (7. Sections 4 through 6 develop our principal results concering the second-price. This assumption. because the number of competitors who are willing to bid at least the reserve price will generally depend on the details of the report: favorable information will attract additional bidders and unfavorable information will discourage them. Recall that in the independent private values model with .

. S. or signals) observed by the individual bidders.) be a vector. and that the best information-reporting policy for the seller in either of these two auctions is to reveal fully his information.. no clear qualitative comparison can be made between the first-price and second-price auctions in the presence of risk aversion. THE GENERAL SYMMETRIC MODEL Consider an auction in which n bidders compete for the possession of a single object.X) ASSUMPTION u(S. Maskin and Riley [Ill). Each bidder possesses some information concerning the object up for sale. Not only must his signal be a sufficient statistic for all of the information he possesses concerning the value of the object to him. both the results that the English auction generates higher average prices than the second-price auction. and is continuous and nondecreasing in its variables. . and all that can be generally said about reserve prices and entry fees in the first-price auction is that the revenue-maximizing fee is positive (cf.X. . . ASSUMPTION 3: For each i. all of the bidders' valuations depend on S in the same manner. . while other components may correspond to the tastes of art connoisseurs not participating in the auction. the first-price auction yields a larger expected price than do the second-price and English auctions. in the sale of a work of art.= ui(S. The derivation of such a statistic from several separate pieces of information is in general a difficult task (see. . . let X = (XI. = ASSUMPTION 2: The function u is nonnegative. It is in the light of these difficulties that we choose to view each Xi as a "value estimate. however. E [ q]< co. the components of which are the real-valued informational variable^'^ (or value estimates. for example. Consequently. 3.X). {Xj)jzi). retain their validity.) be a vector of additional realvalued variables which influence the value of the object to the bidders.THEORY OF AUCTIONS 1097 risk aversion. With constant absolute risk aversion. Let S = (S. some of the components may represent appraisals obtained by the seller. and each bidder's valuation is a symmetric function of the other bidders' signals. u. . ." which may be correlated with the "estimates" of others but is the only piece of information available to bidder i. Some of the components of S might be observed by the seller. The actual value of the object to bidder i-which may. the discussion in Engelbrecht-Wiggans and Weber [7]). I4To represent a bidder's information by a single real-valued signal is to make two substantive assumptions. depend on variables not 'observed by him at the time of the auction-will be denoted by q. of course. In our more general model. it must also adequately summarize his information concerning the signals received by the other bidders. X. these tastes could affect the resale value of the object. For example.(S. We make the following assumptions: 1: There is a function u on Rm+" such that for all i..

S. Roughly. and related results are reported by Milgrom [18] and Whitt [32]. except for the explicit characterizations of equilibrium strategies. WEBER Both the private values model and the common value model involve valuations of this form. a21nf/aziazj 2 0. the following simple definition will suffice. A general definition of affiliation is given in the Appendix. J. we assume that the bidders' valuations are in monetary units. . In the general case. . Part (ii) is easily checked. In the first case. Milgrom. are affiliated. THEOREM 1: Let f : Rk+ R. We say that the variables of the model are affiated if. . X. R. and let z A z' denote the component-wise minimum. A proof of part (i) can be found in Topkis 128. using techniques developed in Engelbrecht-Wiggans. We make two assumptions about the joint distribution of S and X: ASSUMPTION 4: f is symmetric in its last n arguments. = S . continue to hold when this assumption is eliminated. the major results are those given by Theorems 1-5 below. m = 0 and each = Xi. p. MILGROM AND R. For variables with densities. and by ensuring the existence of equilibrium points in pure strategies. All of the results in this paper. Milgrom [17]. .1098 P.x) denote the joint probability densityI5 of the random elements of the model. These randomized strategies can be obtained directly. . . Let z and z' be points in Rm+". . property"). or indirectly as the limits of sequences of pure equilibrium strategies of the games studied here. and Milgrom and Weber [19]. equilibrium strategies may involve randomization. m = 1 and each y. ASSUMPTION 5: The variables S. in the second case. and that the bidders are neutral in their attitudes towards risk. 3101. (ii) If f(z) = g(z)h(z) where g and h are nonnegative and affiliated..b. Let z V z' denote the component-wise maximum of z and z'. For our purposes.. and Weber [S]. . . this condition means that large values for some of the variables make the other variables more likely to be large than small. Hence. Throughout the next four sections. We call inequality (2) the "affiliation inequality" (though it is also known as the "FKG inequality" and the "MTP. Let f(s. then f is affiliated. for all z and z'. and a function f satisfying (2) is said to be "affiliated. (i) Iff is strictly positive and twice continuously differentiable. then f is affiliated if and only if for i # j. . I5This assumption-that the joint distribution of the various signals has an associated densitysubstantially simplifies the development of our results by making the statement of later assumptions simpler. if bidder i receives the object being sold and pays the amount b. X.." Some consequences of affiliation are discussed by Karlin and Rinott [lo] and by Tong [27]. . his payoff is simply V.

denote the largest. g ( x Is) / g ( x 1 s f )2 g(x' I s ) / g ( x ' 1 s'). Consequently. S. . which are used repeatedly.I are affiliated. THEOREM 3: If Z.. .. . . and they are statistically independent. The joint density of S. . it formalizes the assumption that in an auction for a painting. . . Then. Applying Theorem 1 (ii) to (4). .. Is) denote the conditional density of any X.-. the mineral rights model fits our formulation.. THEOREM 2: Iff is affiliated and symmetric in X. we shall need to understand the properties of the distribution of the highest estimates. too. let g(x. Let Y. . . . . we have the following result. . . . The following additional results. And. I s). . . x) = h(s)g(x. for the case of densities g with the monotone likelihood ratio property. . assume that g(x 1s) satisfies (2). Zk are affiliated and g. This is equivalent to the affiliation inequality: g ( x I s)g(x' I s') 2 g(x' I s ) g ( x I so. . . I s) . In this symmetric bidding environment. Y. XI. I6The density g has the monotone likelihood ratio property if for all s' > s and x' > x .1099 THEORY O F AUCTIONS In the independent private values model. We will find that.. . . that is. . bidders with higher estimates tend to make higher bids. then g. . at equilibrium. then S1. . we can rewrite bidder 1's value as follows: . .. Y. .is where the last term is an indicator function. . . Y. . Y. The affiliation assumption also accommodates other forms of the density f. . gk are all nondecreasing functions (or all nonincreasing functions). Consequently. . Assume that the density g has the monotone likelihood ratio property. . X. . . are derived in the Appendix. For this case. . we identify competitive behavior with symmetric Nash equilibrium behavior... . .(Z. XI.. .. . . using (I) and the symmetry assumption.). Y. . it accommodates a number of variations of the mineral rights model in which the bidders' estimation errors are positively correlated. Then f(s.. a bidder who finds the painting very beautiful will expect others to admire it. For example. if the inequality in (2) is strict. . gk(Zk)are affiliated. X. X. given the common value S and let h be the marginal density of S. . . . . .16 It then follows from Theorem 1 (ii) that f satisfies (2). the only random variables are XI. (2) always holds with equality: Independent variables are always affiliated.. . .. smallest estimates from among X. .. S. . g(x. In the mineral rights model.

Y. THEOREM 5: Let Z. . . then the strategy b.) 2 0. .(x.. . Then the n-tuple of strategies (b*. then the n-tuple is called an equilibrium point. Our nondegeneracy assumption ensures that v is strictly increasing in its first argument. Theorems 6 and 7 were first proved in that reference. b*) is an equilibrium point of the second-price auction. WEBER THEOREM 4: If Z.. All of our results can be shown to hold without this extra assumption. 4. we can conclude that the function E [V. .) solves this problem for every value of x. . . . b. Let us define a function v : R2+ R by v(x. y ) = E [V. . . J. b.1 strategies..1100 P.. . SECOND-PRICE AUCTIONS'~ In the second-price auction game. . . then Z . . Bidder 1 will win the second-price auction if his bid b exceeds W. .. . = y. . . I XI = x. is a random variable. I70ur basic analysis of the second-price auction is very similar to that given in Milgrom [17]. . = x.. In particular.. . Y. = y].. . is called a best reply to b. . Zk be affiliated and let H be any nondecreasing function. the functions for I = 1. THEOREM 6: Let b*(x) = v(x. .-. Then the highest bid among them will be W = maxF1bj(Xj) which. . for fixed strategies b. and W is the price he will pay if he wins.-. . In view of Theorems 2 and 5. R. Suppose that the bidders j # 1 adopt strategies b. . To simplify later proofs. MILGROM AND R. . = y.. Zk are affiliated. . . k are all nondecreasing. are affiliated. In view of (3) and Theorems 2 and 5. . Then the function h defined by is nondecreasing in all of its arguments. we add the nondegeneracy assumption that this function is strictly increasing in x. Since the auction is symmetric. although the present set-up is a bit different.] is nondecreasing in x.) is a best reply to the remaining n . a strategy for bidder i is a function mapping his value estimate xi into a bid b = bi(x. let us focus our attention on the bidding decision faced by bidder 1. v is nondecreasing. . his decision problem is to choose a bid b to solve If b. . I X. Zk-.x). Y. . . Thus. If each bi in an n-tuple (b.

the integrand is positive for a < x and negative for a > x. . . . Hence. (It differs from the mineral rights model in not requiring the bidders' estimates of V to be conditionally independent. This proves that b* is a best reply for bidder 1. . = Vn = V. of the common value V. Y. .) Suppose that.). i.)can be written as g(V. in this (n 1)-bidder second-price auction.D. . .. . Consequently. Xn. .Xn+.) where bn = 0 is an equilibrium point. u(X. We call this the generalized mineral rights model. + 7: For the generalized mineral rights model. Y. Xn+. PROOF:Let Z = max(X.tuple (b*. Since u is nondecreasing. .. the integral is maximized by choosing b so that b*-'(b) = x. 5 0. in this context. If bidder n + 1 observes X. Y.). X. is a garbling of THEOREM (XI. . ..) if the joint density of (V.1101 THEORY OF AUCTIONS PROOF:Since b* is increasing. . bn . b = b*(x). so the last expectation is nonpositive.]. . . the (n I). I x) is the conditional density of Y. + + + + + . then bidder n 1 has no strategy that earns a positive expected payoff when bidders 1. a consequence of the garbling assumption.) . We say that Xn+.. then his conditional expected payoff is The last equality uses the fact that E [ V 1 XI.I XI.(. . . . if bidder n + l bases his estimate Xn+.E.). . Z) Q. is a garbling of (X. this condition would hold.I = E [ V I XI. XI.+. So bidder 1's conditional expected payoff when he bids b is * . we introduce an (n ])st bidder with an estimate Xn+. if Xn+. For example. Y.e. and then makes a winning bid b. .. = .) . Q. . b*). Since v is increasing in its first argument.E. Y.D. h(Xn+. An important special case arises if we assume that V. Y.u(Z. W = b*(Y. Y.).. given X I = x. . . b*.X. = V . only on information that was also available to bidder 1. n use (b*.'(b) =Jb -m [~(x7a)-v(aj~)]fy1(aIx)daj where fy.

that is. MILGROM AND R. J. R. x. . I XI = x. . for example.x. and 5 to get: I8This might be the case if. is the expected price paid by bidder 1 when he wins..) applies to the random elements of the model. a new conditional joint density f(s. carrying out the same analysis as . regardless of the winner's identity.. w is nondecreasing. is publicly announced. (which is affiliated with all the other random elements of the model). For x > y. . . be the expected selling price when no public information is revealed and let R. The same argument applies to R. R. note the following identities. 2 R. I x. and it is straightforward to verify that the conditional density satisfies the affiliation inequality. into a bid. For any fixed value of X.) is the price paid when bidder 1 wins. R.). be the expected price when X. . Y. s. Let R. PROOF:Recall that v(Y.. y . it is the expected price. that this time a strategy maps two variables.. . . there is an equilibrium (6. we apply Theorems 2.. We shall assume the seller's revelations are credible. Y1 = y . x. is made public. After X.) = w(x. . Xo = z]. By symmetry. which valued its reputation for truthfulness. b) given by b(x. 4. So. or if the seller were an institution. l 8 Define a function w : R3+ R by w(x. there were some effective recourse available to the buyer if the seller made a false announcement. z) = E [V. like an auction house. Next. .. . . THEOREM 8: The expected selling prices are as follows: Revealing information publicly raises revenues.1102 P. x. representing private and public information. Thus.. . the equilibrium strategy is a function of a single variable and is similar in form to b*. x. By Theorems 2 and 5. WEBER Now consider how the equilibrium is affected when the seller publicly reveals some information X. Note before.

We call r the seller's reporting policy. on average. Let Z be a random variable. if this policy of the seller were known.(.THEORY O F AUCTIONS = E [ w ( ~ 1~.e. There are many possible information revelation policies. . In some. . If one assumes that the bidders know the information policy. The conditional distribution of X i .e. For any realization xb of X i .. X. . no reporting policy leads to a higher expected price than the policy of always reporting Xo. rational bidders would correctly interpret the absence of any report as a bad sign. . Therefore.. ) ]= R.. Theorem 8 indicates that publicly revealing the information X . i. then the variables S . One might wonder whether it would be better still to censor information sometimes. by Theorem 1. and the density always will have the f o m f ( s . x)g(xo I xb)/f(xo). uniformly distributed on 10. further raises expected revenues.. 1 Xi) denotes the conditional distribution of Xo given Xb.D. Q. which satisfies the affiliation inequality in ( s . We formulate the seller's report very generally as X i = r(X. Of course. the seller's report may depend both on his information and the spin of a roulette wheel. A density with respect to any product measure suffices for our analysis.) and the marginal density by g(X@. .. and the auction ends when no one is willing to raise the I 9 l f Gx. to report Xo only when it exceeds some critical level. x ) g ( x b I xo)/g(xb). though that report may consist of a blank page. 2 ) . Q.. 5. the corresponding conditional joint densityI9 of ( S . then one can also assume without loss of generality that the seller always makes some report. Z ) . is better. But revealing both X . .E.X ) . x o ){l x 1 > Y . PROOF:Let r be any reporting policy and let XA = r(X. and X i leads to the same equilibrium bidding as revealing just X.. THEOREM 9: In the second-price auction. by Theorem 8.D. where M is Lebesgue measure. .1 . always will have a density with respect to the product measure M m X G(. . 1x3X M". depends only on X. I] and independent of the other variables of the model. . . X. Sm. i.X ) is f ( s . so the result follows. Xo..E. We denote the conditional density (if one exists) by g(XA1 X. ENGLISH AUCTIONS There are many variants of the English auction. than revealing no information. revealing X . so the theorem is proved by our argument. x ) since f does. the bids are called by the bidders themselves. given the original variables ( S .

. . . No bidder who has dropped out can become active again. in which the price is posted using an electronic display. and a bidder who wishes to be active at the current price depresses a button. R. .) defined iteratively as follows. and he pays a price equal to the other bidder's number. at that point. In the English auction with only two bidders. WEBER bid. We idealize the auction as follows. . MILGROM AND R. the auctioneer calls the bids.. = x. the price is raised continuously. . . A strategy for bidder i specifies whether. Let k denote the number of bidders who have quit and let p . It is natural to require that bik(xiI p l . .pk) be at leastp. 5 p k denote the levels at which they quit. As the auctioneer raises the price. . as a function of his value estimate..20 In others. (5) b. used in Japan. . k other bidders have quit at the prices p. . We use the term "English auction" to designate this variant. Now consider the strategy b* = (b. Initially.. J. and the levels at which they quit.*-. In that variant. . . After any bidder quits. Cassady [2] has described yet another variant. These three forms of the English auction correspond to three quite different games. . all bidders are active at a price of zero. he has withdrawn from the auction. the bidding behavior of those who drop out early in an English auction can convey information to those who keep bidding. at any price level p. b. . . the number of bidders who have quit the bidding. 5 .p. When he releases the button. Then bidder i's strategy can be described by functions bik(xiI p. . .pk) which specify the price at which bidder i will quit if. and a willing bidder indicates his assent by some slight gesture.(x) = E [ V. with only two bidders. Y. usually in a way that preserves his anonymity. each bidder's strategy can be completely described by a single number which specifies how high to compete before ceding the contest to the other bidder. The bidder selecting the higher number wins. . the English and second-price auctions are strategically equivalent. however. and our model of the auction as a game must account for that possibility. . . Y. Thus. ..- = x]. The game model developed in this section corresponds most closely to the Japanese variant. We assume that both the price level and the number of active bidders are continuously displayed.1104 P. When there are three or more bidders. . bidders drop out one by one. he will remain active or drop out. all remaining active bidders know the price at which he quit.. 20A model in which the bidders call the bids has been analyzed by Wilson [33]. [ X I= x.

. . Yn= yn. . the price he will pay is E [V. .* is increasing in its first argument. n adopt b* and bidder 1 wins the auction. = z]. n were to quit instantly. ... Suppose. If bidders 2. bidder 1 will win if and only if X. I X. . The other strategies b$ have similar interpretations. = y. = y ] . i. . . . Using b*. . . X. is E [ V. .2 bidders with the lowest estimates reveal their signals publicly through their bidding behavior. except that Y.* calls for bidder 1 to remain active until the price rises to the point where he would be just indifferent between winning and losing at that price. then bidder 1 could infer from this behavior that y l = . Suppose. . In phase 1. Yn-. } is null).. given XI. that k = 0. Y. . the n .E.. Yn-. . . In effect. . PROOF:This is identical to the proof of Theorem 8. . .. .. Yn-. that difference is positive if x > y and negative if x < y .D. . Y. = x . . are the realizations of Y. = y. . Y.e. .. . = y .*(y) and that bidder 1 has observed X I = x . too. Y. . but they assume that bidders infer whatever they can from the quitting prices of those who are no longer active. Thus. the last two bidders engage in a second-price auction..THEORY OF AUCTIONS 1105 The component strategies reflect a kind of myopic bidding behavior. he would estimate his payoff to be E [V. = yn. b*) is an equilibrium point of the English auction game. His conditional estimate of V. . . so his conditional expected payoff is nonnegative if and only if x 2 y.. we obtain corresponding results for English auctions. . .E. Hence b* is a best reply for bidder 1. . if bidders 2.. . Yn. . Hence. . . THEOREM 11: The expected price in the English auction is not less than that in the second-price auction. .] where y. PROOF:It is straightforward to verify from (5) and (6) that each b.. for example. > Y. {XI = Y. . I XI = y.b$(y). THEOREM 10: The n-tuple (b*. . Yn-. play the role of X..I. b. . Q. Then. . I X I = x . the English auction proceeds in two phases. no bidder has quit yet. that the price has reached the level b..D. . Define 5 and i? as follows. = Yn-. = y. We know from Theorem 8 that the public information phase raises the expected selling price.. By mimicking the proofs of Theorem 8 and 9. In that case. . (recall that the event Q.yn-. By (5) and Theorem 5. . .

The first-order condition for a maximum of II(b. .1106 P. . let n = 2 and take X I and X2 to be either independent and uniformly distributed on [0. that is. let V. when b* is increasing and differentiable.Y17 Y2. b* need not be continuous. x ) is where II. 21. . MILGROM AND R. . the expectedprice is R. For example. .) Finally. . his expected payoff II(b. denotes aII/ab and FYIis the cumulative distribution corresponding to the density fyl. If bidder 1 then observes XI = x and bids b. If the seller announces Xo. Substituting b*(x) for b in the first-order condition and rearranging terms leads his derivation of the necessary conditions follows Wilson [34]. . . 6. If b* is a best reply for 1. R: 2 R/ THEOREM13: In the English auction. n adopt the strategy b*. J. and X 2 are affiliated. = X i . . . Then b* jumps from 1/2 to 1 at x = 1. no reporting policy leads to a higher expected price than the policy of always reporting Xo. the expectedprice is Revealing information publicly raises revenues.21Suppose bidders 2. 11 (with probability 1/2). x ) will be given by where x is infimum of the support of Y. WEBER THEOREM 12: If no information is provided by the seller. Yn-I)I {Xi > Yi}]. FIRST-PRICE AUCTIONS We begin our analysis of first-price auctions by deriving the necessary conditions for an n-tuple (b*. x )= 0. we must have I I b ( b * ( x ) . or independent and uniform on [ l .E = E [ c ( Y l . R. .. . (Note that X . The derivation is heuristic: in general. b*) to be an equilibrium point. .

PROOF:By the affiliation inequality. Otherwise. we take special care to argue without assuming that the equilibrium bidding strategies are continuous or differentiable. x).x) . 2 4 ~ this n proof only. Another necessary condition is that (v(x.. and X - L ( a I x) Let t(x) = = exp ( . x).(x Ix) to be zero when x is not in the support of the distribution of Y . we take f.(x Ix)/F. for any a 5 x and any z' 5 z.D.~ ~ ~ ~ ~ \ ~ ds v(x. Subsequent arguments in this paper involve a variety of differentiability assumptions that are made solely for expositional ease. L ( a x) is taken to be zero. PROOFOF THEOREM 14: Notice that L(. bidder 1's expected payoff would be negative and he could do better by bidding zero.x) . range x 5 a 5 x yields the desired result. . =x. since Theorem 3 permits us to rescale the bidders' estimates monotonically. + THEOREM14: The n-tuple (b*.x). b* must be increasing. These last two restrictions determine the boundary condition: b*(x) = v(x. Integrating with respect to a over the Q. L(a I x) is decreasing in x). .THEORY OF AUCTIONS to a first-order linear differential equation:22 Condition (7) is just one of the conditions necessary for equilibrium. Then b* can also be written as: LEMMA 1: Fy1(xI z)/ fy. where: (8) b*(x) = Jxv(a. 231f the integral is infinite. Then there is no loss of generality in assuming that b* is differentiable.(x I z) is decreasing in z. Since v(a. regarded as a probability distribution on (x. a small increase in the bid from b*(x) to b*(g) c would raise 1's expected payoff from zero to some small positive number. . I x).b*(x) be nonpositive. a ) d ~ ( 1 ax).. we have fy.24Consider bidder 1's best response 2 2 ~ c y onvention. Otherwise. . a ) is increasing. . increases stochastically in x (that is. Temporarily assume that b* is continuous in x.E.(a Iz)/fyl(x Iz) 5 fyl(aIz')/fyl(x Iz'). b*) is an equilibrium of the first-price auction. I . when X. It is also necessary that v(x.b*(x)) be nonnegative.

> > PROOF:If g(x) < h(x) for some x >Z then. z.E. X. by Lemma 1 and the monotonicity of b* and v . WEBER problem. = In F y l ( x E the inequality follows from Lemma 1.. if any Xi exceeds x. . Q. we obtain a collection of subgames. and that in turn implies that FYn_.In Fyl(xI x + c). make use of the following simple lemma. z)) has the same sign as (z . . > LEMMA 2: Let g and h be differentiable functions for which (i) g(&) h(&) and (ii) g(x) < h (x) implies g'(x) hl(x). Therefore..D. .D. But that would contradict the earlier conclusion that F y l ( xI x c) = 0. MILGROM AND R. By symmetry. there would be some point z = (z. . (Otherwise. = x + c. It remains to consider the cases where b* (as defined by (8)) is discontinuous at some point x. . By (7). by the mean value theorem. the bracketed expression is zero when x = z. The first part of our proof then applies to each subgame separately.x) such that g(2) < h(2) and g'(2) < h'(2).(x I x c) = 0. the component-wise minimum of these permutations is in the support. Then g(x) h (x) for all x 2 ~ . by affiliation. all of the permutations of z are also in the support and therefore. Now. II. + + + The remaining results in this section.) given X. . it suffices to show that II. z) is nonnegative for x < z and nonpositive for x > z. .E. as well as parts of the analyses in Sections 7 and 8. The final difference can be infinite only if Fyl(xI x E)= 0.(b*(x). Taking the refinement of all such decompositions. It now follows that the bidding game decomposes into two subgames. to show that b*(z) is an optimal bid when X. It is clear that he need only consider bids in the range of b*.) in the conditional support of (X. .(b*(x). R. all must. there is some 2 in @. the first of the following expressions is infinite: + I x + E).x). This contradicts (ii). in one of which it is common knowledge that all estimates exceed x and in the other of which it is common knowledge that none exceed x. Our first application of this lemma is in the proof of the next theorem. Therefore. in each of which b* is continuous. = z.) Thus.1108 P. the bracketed expression (and therefore. J. That can happen only if for all positive E. . Q. with some zi < x.

s) ' By a variant of Lemma 1. X.) I Y. and may raise.z) for all z 2s.b*(x.&.s) represent the equilibrium bidding strategy in the first-price auction after the seller reveals an informational variable X. s) = (w(x. The analogue of equation (7) is: b*'(x. z) 2 W1(z. w(x. The theorem follows upon noting that the expected prices in the first-price and second-price auctions are E [ w'(x.)]. THEOREM 16: In the first-price auction. bidder 1's problem at equilibrium when XI = z is to choose a bid. The equilibrium boundary condition is b*(z.X. Hence. z) 0.&)= v ( z .x. = zl. 2 w. W:(X.z) = b*(x) and W2(x.z)F.z) = E [ u ( Y.z) < W1(z. by (9). The first-order condition must hold at x = z: where R. W2(z.. Therefore. (ii) bidder 1's estimate is z.z) denote the expected value received by bidder 1 if his own estimate is z and he bids as if it were x. = s. s) . by Lemma 2. either the first-price or second-price mechanism) if (i) the other bidders follow their equilibrium strategies. Y.)] and E [ w~(x. The equilibrium boundary condition is: WM(&. z) . PROOF:Let b*(.s) is nondecreasing in s. > + A similar argument is used below to establish that in a first-price auction the seller can raise the expected price by adopting a policy of revealing his information. In mechanism M.) I {XI > Y..E.WM(x.' W: = dW1/dz.s)/Fyl(x I x. Hence.1109 THEORY O F AUCTIONS THEOREM 15: The expected selling price in the second-price auction is at least as large as in the first-price auction.s) is also nondecreasing in s. respectively.) I {XI > Y.x.](x I z).(xI X ~ S ) Fyl(x I x.z) denote the conditional expected payment made by bidder 1 in auction mechanism M (in the case at hand. From Theorem 5 it follows that w. that is. . and (iv) he wins. and by Theorem 5. z) = 0. or equivalently to choose x.x. the expected price. Clearly. ~ ) . define Let WM(x. PROOF:Let R(x. (iii) he bids as if it were x. s)) fr. we have W1(x.z) for some z. fyl(xI x. to maximize R(x. s) = w(&. if W2(z.s).D. For the first-price and second-price mechanisms. and W? denote the relevant partial derivatives. Q.(x.. then dW2/dz = W: + W. applying Lemma 2 to the functions . < x. a policy of publicly revealing the seller's information cannot lower.

. the price is statistically linked to that estimate. XI =&I = v(x. W*(z. tion raises the expected price. yields the lowest expected price.z)2 0. . However. were to commit himself to some bidding strategy b*(x. by Lemma 2.. < x. Hence.x).) I {X. and to the seller's estimate as well. and 16 that lends some insight into why the three auctions we have studied can be ranked by the expected revenues they generate. . prices (and the allocation of the object being sold) can depend only on the reports that the bidders make and on the seller's information. Therefore. we can conclude that b*(x. for example.)].1110 P. and revealing information links the price to that information as well. and to the extent that these other variables are (at equilibrium) affiliated with the winner's value estimate.). W* must satisfy (9). 11. In the first-price auction. The result of this linkage is that the expected price paid by the bidder. are still affiliated.z) > w l ( z .z) = E [b*(x. a steeper payment function yields higher prices (and lower bidder profits). . to the extent that the price in an auction depends directly on variables other than the winning bidder's report..). with linkages to all of their estimates.. X.s) is nondecreasing in s. x. In the second-price auction. THEOREM 17: In the first-price auction. WEBER b*(.X. No auction mechanism can determine prices directly in terms of the bidders' preferences and information.x. his optimal choice would be x = z (since b*(z.*(x. z) for all z 2 ~the. the price is linked to the estimates of all the non-winning bidders. with no linkages to the other bidders' estimates. releasing informaQ. > Y. X. no reporting policy leads to a higher expected price than the policy of always reporting X.) I Y. details follow just as in the proof of Theorem 15. X. as a function of his estimate. In the English auction. XI) I {X. Since a winning bidder with estimate x expects to pay v(& in all of the auctions we have analyzed. Thus. increases more steeply in his estimate than it otherwise might. The expected prices. > Y.) is optimal when X.s) for any two different values of s. W..) I Y. even when the winning bidder's report x is held fixed. This thread is most easily identified by viewing the auctions as "revelation games" in which each bidder chooses a report x instead of a bid b*(x). . J. then. and why policies of revealing information raise expected prices. Thus. but after observing X I = z. are E [ W*(X.)] and E[w'(x. revealing the seller's information links the price to that information. the price is linked to the estimate of the second-highest bidder. By Theorem 5.. . X I = z]. with and without the release of information. There is a common thread running through Theorems 8.. = x. prior to learning X. X. we have the following analogue of Theorems 9 and 13. Let W*(x. R.x. 12. =g. The first-price auction. conditional on that information.E. The English auction. If bidder 1. Note that W*(& = E [w(x. MILGROM AND R. If the seller reveals only some of his information.D. should he reveal it. 15.

the same set of bidders participates. Thus. Riley and Samuelson [24]). the price he pays is equal to r. we have been making the implicit assumption that there is a reserve price of zero.' and each has (ex ante) expected payoff (l/n(n + 1)) + k. in all three. For every k 2 0 there is an equilibrium point in which each bidder uses the bidding strategy b(x) = (n/(n + 1)). and the symmetric equilibrium strategy becomes b*(x) = re L(x* I x) b*(x) <r + i. and 14) to accommodate reserve prices." in the sense that Assumption 2 (nonnegativity of K) ensured that no bidder would wish to abstain from participation in the auction. revealing information adds a linkage and thus. Matthews [13]. second-price auction. x . it raises the expected price. a ) dL(a I x) for for 2 x*. In all three auctions. In the first-price auction. 1). y l = x*] > E I V I / X I = x*. RESERVE PRICES AND ENTRY FEES The developments in Sections 4-6 omit any mention of the seller setting a reserve price or charging an entry fee. Moreover. in the second-price auction with reserve price r. setting a reserve price r above v(x. If an auction is conducted with no reserve price.:v(a. n/(n + 1)) if k = 0.by permitting only nonnegative bids. when o(x*.co. or English auction. x where x* = x*(r) is called the screening level and is given by It is important to note that when the same reserve price r is used in a first-price. 10. This reserve price has been "non-binding.25 Such devices are commonly used in auctions and are believed to raise the seller's revenue. It is straightforward to adapt the equilibrium characterization theorems (Theorems 6.n/(n 1) . 26Theoutcome of this auction is determined as if the seller had bid r. <r for x b*(x) < x*. = Xiare independent and uniformly distributed on (0.x) simply alters the boundary condition. other symmetric equilibria may appear. when all V.k / x n . For example. A formal description of equilibrium with a reserve price in an English auction 25Actually.26 the equilibrium bidding strategy is b*(x) = v(x. x < x*.k) if k > 0. The range of the strategy function is (0.11 11 THEORY O F AUCTIONS yields the highest expected price. and is ( . if only one bidder bids more than r. This may explain why almost all observed auctions incorporate (at leas$ implicitly) a reserve price. + . It is of interest to note that. Y I < x*]. a great deal of attention has recently been devoted to the problem of setting reserve prices and entry fees optimally (Harris and Raviv [S]. x*) = E I V l ( X I = x*.x) for x 2 x*. Thus. at equilibrium there will be no bids in a neighborhood of r. 7. Maskin and Riley [ll]. consider a first-price auction in the independent private values setting.

PROOF:Let YT = max(Y. Theorem 18 has the corollary that no policy of partially reporting the seller's information leads to a higher expected price than full revelation: Again. Hence. a policy of announcing X . we call r(z I F) the reserve price corresponding to z. the equilibrium strategies incorporate the inference that if a bidder does not participate. so that Y . which in turn generates higher average prices than the first-price auction. with probability 1/2. and 16.. we more generally define the screening level x*(r. an entry fee might discourage participation by some bidder with a valuation x well above x*(r. Q. With a fixed reserve price. from a uniform distribution on [I. or English auction. If he fixes a reserve price and then reveals his information. It is clear from expression (10) that x* is decreasing in F and maps onto the range of XI. the X.. his valuation must be less than x*.e) if he perceives his chance of winning (Fy. With a reserve price of zero and an entry fee of 0. y) = EIVI I XI = x. . With probability 1/2. e) to be It is not always true that the set of bidders who will choose to pay the entry fee and participate in an auction consists of all those whose value estimates exceed the screening level. Assume = X . he will generally affect x* and hence change the set of bidders who are willing to compete.z) = E [V1I X I = x. . J.." When both a reserve price r and an entry fee e are given. and YT are affiliated and v* and w* are nondecreasing. X Iand X.x*(F)). "honesty is the best policy. 12. THEOREM18: Given any reserve price r for the first-price.27 270ne such case is the following. V. MILGROM AND R. we assumed that the reserve price was zero. WEBER would be lengthy. R.0 will choose not to bid.8 but some bidders with valuations exceeding 1. X o = z]. and setting the corresponding reserve price raises expected revenues. E. There are two variables. XI.21 and. and realization z of X. so that revealing information would not alter the set of competitors. 21. Given any reserve price F. there exists a reserve price r = r(z IF) such that x*(r 1 z) = x*(F). Then F. y.. YT = y ] and let w*(x. By Theorems 2-5. x + = 0.'s are drawn independently from a uniform distribution on [O. let x*(FIz) denote the resulting value of x*. As with Theorems 8. X. YT = y. In our information revelation theorems. Let v*(x...D. = X. The introduction of a reserve price does not alter these important conclusions.(x I x) jumps down from 1/2 to 1/4 as x passes up through 1.1112 P. so the arguments used for Theorems 8 and 12 still apply. In a first-price auction. second-price.(xI x ) ) as being slight. The argument used in the proof of Theorem 16 generalizes without difficulty. More subtle and interesting issues arise when the seller has private information. given 7.32. one can again show that the English auction generates higher average prices than the second-price auction.

P(x*.. E)-auction and the seller's expected revenue from each of them is less than it is in the (r. such bidders will participate in the (F.. we shall not repeat them here. it pays to set high entry fees and low reserve prices. e). since (r. Also. z) and P(x. It remains to show that bidders with estimates z < x* will choose not to participate in the (7. C) is regular. z) is quasiconcave for each of the three auction forms.z) = b ( x ) ~ .(z. For the second-price or English auction.) Defining R as in the proof of Theorem 15.z) . z) denote the expected payments made by bidder 1 in the (r. PROOF:Let P(x. ~ (lz) x E.e. but the expected revenue from the (F. In the proofs of Theorems 6. If the two auctions are first-price auctions with equilibrium strategies b and 6. then we say that the pair (r. or English). only when Y. and suppose that the (reserve price. an application of Lemma 2 yields P(z. Instead. THEOREM 19: Fix an auction mechanism (first-price.E)-auction. x*(r.&(x. x*) = R(x*. the payments made by a bidder when his type is z and he bids as if it were x differ only when he pays the reserve price. ?)-auction for a bidder with estimate z 2 x* is R (z. e)-auction. z) = (r . z) = R. z) for all z 2 x*.11 13 THEORY OF AUCTIONS If the set of bidders who participate at equilibrium in an auction with reserve price r and entry fee e does consist of those with valuations exceeding x*(r.P(z.(z. the functions cannot cross and so b < b everywhere. Hence. Let (F. when (i) the other bidders follow their equilibrium strategies. Z) .x*) = P(x*. z) . Z)-auction is less than or equal to that from the (r. i.e. Hence. entry fee) pair (r. e) = x *(F. + + since the partial derivative term is negative (by affiliation). R (x. Lemma 2 implies that P(z. respectively.P(z. we observe this consequence of quasiconcavity: for z < x*.x*). and 14.z) 2 P(z.z). Those arguments remain valid in the present context. z) = P. . we argued (implicitly) that the decision problem max. then P(x. Since b and b are solutions of the same differential equation. z) for all z 2 x*. e)-auction. e) is regular. z) . P2(x. ?)) and with ? < e.(z.z) . E) be another pair with the same screening level (i. z) 2 0.z) = b(x)Fyl(xI Z) e and P(x. (Notice that P and P are not conditioned on bidder 1 winning. we have the following equilibrium conditions: P. ?)-auction. 10.F)(a/az)Fyl(x* 1 z) 2 0. The expected payoff at equilibrium in the (7. Once again. The resulting expected payoff to a bidder with estimate z is R(x*. and (iii) he bids as if his estimate were x. e) is regular. with b(x*) = r < F = b(x*). e) is regular for that auction. Therefore. Then (7. The next result shows that among regular pairs with a fixed screening level.P(x.e)-auction and the (F. z) 2 P(z. and that the maximum is attained at x = z. (ii) bidder 1's estimate is z. z) 2 R (z. and P(x*. second-price. < x*.z). the optimal choice of x subject to the constraint x 2 x* is x = x*. rather than the reverse.

MILGROM AND R.e)-auction is regular. by affiliation. x * ) . Let b: denote the equilibrium strategy in the first-price auction. To treat the second-price auction when bidders are risk averse and do not know their own valuations. we have shown that the English.E.z) = F ( x * . From (1 1) it follows that whenever b:(x) < b$(x). = y ] = u(0). WEBER + Now. Now let bidder i's payoff be u(Xi . P ( x * .P(x*. In conjunction with our earlier result (Theorem 15). this implies that. and. . . for x >x.x*).b) when he wins at a price of b. the expected profit of the bidder with estimate z is R(x*.r)[Fyl(x*I z) Fyl(x*Ix*)]. the first. second-price. we investigate the robustness of those results when the bidders may be risk averse. the first-price auction leads to higher prices than the second-price auction. For this model.D. raises the expected selling price. We have also shown that in the English and second-price auctions. R.v(x. It then follows from Lemma 2 that. z ) . independent of risk attitudes. are independent. For simplicity. Therefore F(x*. b:'(x) > b$'(x).P(x*. Let b$ denote the equilibrium with risk-neutral bidders. Let v(x. it is useful to generalize the definition of the function v . differentiable function satisfying u(0) = 0. concave. we limit attention to the case of zero reserve prices and zero entry fees. z) . the bracketed term is nonnegative. In this section. But P(x*.z) 2 P(x*.z). and this last expression is nonpositive because the (r.and second-price auctions cannot generally be ranked by their expected prices. b:(x) > b$(x): risk aversion = Xi. for models that include both affiliation and risk aversion. It is straightforward to verify that. RISK AVERSION In the model with risk-neutral bidders. < 8.x*) = P(x*. J. Y .and second-price auctions generate identical expected prices. Hence. in which 15 = Xi and XI.z). . Q.P(x*. where u is some increasing. z) P(x*. the equilibrium boundary condition is: b$&) = b:(s) =&. the first. . Thus.x*) = R(x*. Then the analogue of the differential equation (7) is: where the inequality follows from the concavity of u. with independent private values and risk aversion. y)) I XI = x.x*) (7 . X.1114 P. with the second-price auction equilibrium strategy is b*(x) = x. and first-price auctions can be ranked by the expected prices they generate. y ) be the unique solution of: E[U(V. z) R(x*. Consider first the independent private values model. . the seller benefits by establishing a policy of complete disclosure of his information. .

R (x)) I X = x] = u(0) and define R by E [u(V .)/uf(. Suppose X and Z are independent and P {X = 0) = P {X = 1 ) = 1/2. Y. X) that revealing X raises average willingness to pay if and only if the coefficient of absolute risk aversion . and E[R. Applied to risk-averse bidders. . Finally. R. Let us now rephrase this issue more formally. So. Fix u and let be the willingness to pay for V. and normalize so that u(0) = 0.(l) = a . THEOREM 20: Let u be an increasing utility function. For a given utility function u and a random pair ( V. Let R.R)] = u(0).u"(. positive .. Similarly. clearly. x). it is not generally true that partially resolving uncertainty reduces the risk premium.l) and let V. Let X take values in {O. PROOF:We shall consider a family of random pairs (V. X). the risk premium is reduced to zero. it is useful to generalize the definition of w.(x) be defined as in the text. Then it is true for every random pair (V. .] 2 v(X. But for risk-averse bidders..(O) = 0. If revealing X always increases willingness to pay. define R (x) by E [z! ( V . where Z is some unspecified random variable.) is a nonnegative constant. If the information being conveyed is perfect information (so that it resolves uncertainty completely). b*) is an equilibrium point of the second-price auction when b*(x) = v(x. = a/2.THEORY OF AUCTIONS 11 15 The proof of Theorem 6 can be directly generalized to show that (b*. . Let w(x.Yl. the class of utility functions for which any partial resolution of uncertainty tends to reduce the risk premium is a very narrow one. then. then Since this holds with equality at a =0 and since it must hold for all a . we used the fact that the relation E [ ~ ( x . In fact. . . this inequality asserts that resolving uncertainty by releasing information reduces the risk premium demanded by the bidders. Y. y. = X ( Z + a).XO) 1x1.(X)] Z a/2.z) be the unique solution of: In proving that releasing public information raises the expected selling price in Section 4. when there is no information. X). suppose E[u(Z)] = u(O).) holds with equality when the bidders are risk neutral. We shall say that revealing X raises average willingness to pay if E [R (X)] 2 R. Then R.

This inequality can be used to generalize our various results concerning English and second-price auctions.ax). the final expression must be maximized when a = 0: Now. It then follows that g(w) = cw + ul(0) and hence that ul(x) = cu(x) ul(0). since u' 2 0. and (iii) the expected price in the English auction is at least as large as in the second-price auction. Then + E E exp a E . PROOF:AS in the risk-neutral developments.D. everything hinges on the initial statement about information release raising the expected price in a second-price auction. The inequality condition in (12) rules out B > 0. THEOREM 21 : Suppose the bidders are risk averse and have constant absolute risk aversion. we can obtain any desired random variable W on the range of u. = y ] 2 V(X. A straightforward corollary of this result is that E [w(X.R ( x ) ) ) E [ u ( v [ (( = E exp a K-R(x)))u(o)] [ (( = It follows that . J. let g(w) = uf(u-'(w)) and let W = u(Z). R(x))Ix]] . This proves the first assertion of the theorem. and the corollary of Theorem 20 observed in the text.E. full reporting leads to the highest expected price.y).. Y. Note that w is a nondecreasing function.R ( x ) ) ) u ( v - [ [ (( = E exp a R . We shall prove only this proposition. Theorem 5.R(x)) 1XI] Q. revealing public information raises the expected price. The conclusion reached above can be restated as: E [ W] = 0 implies E [ g ( W)] = uf(0). By varying Z.1116 P. R.E [R(X)] 5 0. or u(x) = A + Becx. we have for all x > y that .exp(. Hence u is linear (and we are done). W) and let u(x) = . (ii) among all possible information reporting policies for the seller in second-price and English auctions. Y.. it follows that c 5 0. WEBER and negative. From this fact. Next fix (V. Then (i) in the second-price and English auctions. MILGROM AND R.Xo) I XI = x.

or about the effects of the resale market in drilling rights on the equilibria in the auction games. in bidding for the development of a weapons system.. which is the desired result.}].THEORY OF AUCTIONS 11 17 Hence E[v(Y. and the various forms of auctions in current use account for hundreds of billions of dollars of trading every year.. Department of the Interior auctions drilling rights for oil. Y. this combination of conditions is unusual. Generally. This fact affects bidding behavior in subtle ways. This assumption is sometimes unreasonable.D. For example. Examples suggest that an optimal bidding strategy in this situation may involve placing high bids on a few tracts and low bids on several others of comparable value (Engelbrecht-Wiggans and Weber [6]). A bidder submitting bids on many tracts may be as concerned about winning too many tracts as about winning too few. it reduces each bidder's average profit by diluting his informational advantage. and makes it very difficult to give a meaningful interpretation to bidding data. Another basic issue is whether the noncooperative game formulation of auctions is a reasonable one. Q. but it . 9.E. when the U. Most analyses of competitive bidding situations are based on the assumption that each auction can be treated in isolation.. For example. Y. the theory of auctions is still poorly developed. This is represented by the first inequality in the proof. Thus. First. partial resolution of uncertainty can either increase or reduce a risk-averse bidder's average willingness to pay. the intelligent bidder realizes that the contract price will later be subject to profitable renegotiation. WHERE NOW FOR AUCTION THEORY? The use of auctions in the conduct of human affairs has ancient roots. One obstacle to achieving a satisfactory theory of bidding is the tremendous complexity of some of the environments in which auctions are conducted. when the inevitable changes are made in the specifications of the weapons system. Theorem 21 may account for the frequent use of English auctions and the reporting of expert appraisals by reputable auction houses. when bidders have constant absolute risk aversion. The extent of this dilution is represented by the second inequality in the proof. > Y .Little is understood about these simultaneous auctions. the cases of reduced average willingness to pay can only arise when the range of possible wealth outcomes from the auction is large (so that the bidders' coefficients of absolute risk aversion may vary substantially over this range) and when the unresolved uncertainty is substantial.X. Second. The proof of Theorem 21 suggests that reporting information to the bidders has two effects. reporting information raises the bidders' average willingness to pay.)I {X. Yet despite the age and importance of auctions. ) ] S E[w(Y. > Y. The analysis that we have offered seems reasonable when the bidders do not know each other and do not expect to meet again. Since only an increase is possible when bidders have constant absolute risk aversion or when the resolution of uncertainty is complete.S. it may offer about 200 tracts for sale simultaneously.)I {X. For auctions conducted at auction houses.

i. when the bidders (owners of lumber mills) are members of a trade association and bid repeatedly against each other. . . Northwestern University Manuscript received November. . That raises the question: which auction forms are most (least) subject to these collusive effects? Issues of collusion also arise in the study of bidding by syndicates of bidders. if z V z' and z A z' are in S whenever z and z' are. DEFINITION: Z. Let Z = ( Z . . for example. With this definition of affiliation.. a subset S of Rk is a sublattice if its indicator function Is is affiliated. for example. as a model of auctions for timber rights on federal land. REMARK:It would be equivalent to require P ( J E )2 P ( ~ ) P ( Bor) even P ( A B )5 P ( x ) P ( B ) . We begin by establishing the important properties of associated variables. . we shall also need to establish the equivalence of this definition and the one in Section 3 for variables with densities. DEFINITION: Z .. Maskin and Riley [12]. i. . Nevertheless. a subset A of Rk is called increasing if its indicator function 1. . P ( A B ) 2 P ( A ) P ( B ) . However. Recent studies (Harris and Raviv [S]. 1981. . . Theorems 3-5 become relatively easy to prove. Thus. Why do large oil companies sometimes join with smaller companies in making bids? What effect do these syndicates have on average prices? What forces determine which companies join together into a bidding syndicate? Another issue that has received relatively little attention in the bidding literature concerns auctions for shares of a divisible object. . is nondecreasing. the treatment presented here of the role of information in auctions is a first step along the path to understanding auctions which take place in more general environments. (i) Z . A number of important issues. . if the variables are associated conditional on any sublattice. Much remains to be done in the theory of auctions. .e. simply do not arise in the auctions of a single object that have traditionally been studied and that we have analyzed in this paper (see.1118 P.. . The theory of repeated games suggests that collusive behavior in a single auction can be the result of noncooperative behavior in a repeated bidding situation. Zk are affiliated if for all increasing sets A and B and every sublattice S . some of which are described above. First. .e. . Z k ) be a random k-vector with probability distribution P. MILGROM AND R. Zk are associated. the survey by Weber [31]). P ( A B I S ) 2 P ( A I S ) P ( B I S ) . Second. WEBER is less reasonable. . R. We denote the intersection of the sets A and B by AB and the complement of A by A . . THEOREM 22: The following statements are equivalent. Zk are associated if for all increasing sets A and B . . . revision received August. APPENDIX ON AFFILIATION A general treatment of affiliation requires several new definitions. 1980. Wilson [35]) indicate that such auctions involve a host of new problems that require careful analysis. . J. P ( A ) =-Prob(Z E A).

. THEOREM 24: Let Z = ( Z . we verify that the present definition o f affiliation is equivalent to the one given in Section 3. both f and Z are trivially affiliated. and increasing sets B . . (iii)For every nondecreasing function g and increasing set A . One can show that (ii) implies (iii') by taking h = 1.then Z is affiliated. (ii) For every pair of nondecreasing functions g and h and every sublattice S. [ p ] . I f Z .W e proceed by induction to show that i f f is affiliated a. to show that (iii') implies (i). and h can be similarly approximated using functions h. (iii) For every nondecreasing function g. Theorems 3 and 4 follow easily using part (ii) o f Theorem 23. suppose initially that g and h are nonnegative. then Letting n + co completes the proof for nonnegative g and h. .D. . The next result is a direct corollary o f Theorem 22. The extension to general g and h is routine. Then we can approximate g to within 1 / n by where A. . Then Z is affiliated if and on1 if f satisfies the affi:liation inequality f ( z V z f ) f ( z A z') 2 f ( z ) f ( z f ) for p-almost every ( z . Z k ) have joint probability density!.. = ( x / g ( x ) > i / n ) . Similarly. . . . (i) Z . PROOF:I f k = 1. and sublattice S . Zk are affiliated. PROOF:The inequality in (iii) is equivalent to requiring only (iii'): E [ g ( Z )I A ] 2 E [ g ( Z ) ] since . where p denotes Lebesgue measure. T o see that (i) implies (ii). .E. take g = I.1.e. . . . and Theorem 5 is a direct consequence o f part (iii).. . . increasing set A . Suppose that the implication holds for k = m . . Q. and define . E [ g ( Z ) I = P ( A ) E [ g ( Z ) I A l +P ( m [ g ( Z ) I ~ I l . Zk are associated.z') E R2 z. THEOREM 23: The following statements are equivalent. . . Finally.T H E O R Y OF AUCTIONS (ii) For every pair of nondecreasing functions g and h.

Then + + 6 and it follows that E [ g ( Z ) I Z .2 ' ) = z'. E [ ~ ( Z )I S~] Z .z. and to apply the definition of affiliation using Bayes' Theorem.. PIIOP. Let g be any increasing function on IWk.'The verification amounts to showing that if W.:'.. and will then pass to the limit. Let f . Let Qn(z) denote the unique element of this partition containing the point z. W.1120 P.e. and suppose that f is affiliated. . . we omit the specification "almost everywhere [ y].) f ( t .)]/[fl(zl) + fl(z. We approximate the vector of densities (f(z). Hence E [ g ( Z ) h ( Z ) I S ] = E [ E [ ~ ( Z ) ~ ( Z ) I Z ~ .' Therefore." Let k = m. Also.. 1)-valued random variables with a joint probability distribution P satisfying the affiliation inequality.p.". = x.. E {z. X [ik/2". z A z'). the expression f(z. 1) /2"). the idea of the proof is to take S = {z. l . Y') E Qn(:) x Qn(z')1.. . Notice that. 2 Pl@JP010.) and z . Z. . f ( i A 2')) by the function X n = (X. and consider the function [f(z. let h : IWk + R also be increasing. Clearly..) f(z. by the induction hypothesis. we will approximate S.(z)/P(S).I SS ]] 2 E [ E [ ~ ( Z ) I Z . X. = ( t 2 . = x. which is the conditional density of Z . . S I 2~[g(Z)l~]~E[h(z)lS]..plolpolo)ipll.. Y and Y' are random variables when ( R ~v)~is. z V z'. For any non-null sublattice S./2". = z.]. . f(z v z'). z') = z and YJ(z. .] E [ g ( Z ) I Z . The conclusion follows from the inequalities: (PlllP. and Wj are (0. since f is affiliated. = (Z2. l. WEBER Z . . Let Q n be the partition of @ i n t o k-cubes of the form [i. (i. P . This works. which is affiliated whenever f is. . f ( Y A Y')) I (Y.. and B = { x I x 2 z'}. z m ) In the following arguments.)I is decreasing in z . = z. .") defined on IW2k by: + Xn(z. . there exists a function q : Q 0 x Qo+R such that (i) for every T E QO x QO.. Now. S ] and E[h(Z) I Z .zf)= EL'[(f(Y). 2is affiliated conditional on Z. Since Q 0 X Q 0 has only countably many elements. is affiliated conditional on Z .. denote the marginal density of Z . .j. R. .z'. It can be routinely verified that this function is affiliated. Define a probability measure v on IW2k by v(B) = C TEQoxp~q(T)y(BT) (recall that y denotes Lebesgue measure). viewed as a probability space. and (ii) CTEQaXQoq(T) = 1. Thus we have proved that Z is affiliated iff is.Pl@J)2 0. .] be the expectation operator corresponding to v. Let E"[. Z .q(T) > 0.. . A = {x I x 2 z ) . for every n 2 0..).. and W2 also satisfies the inequality. S ~ . f(zl). AS. X. MILGROM AND R. . .. P ~2 l P I O I P ~ I . .. 1)/2") X . i. z.. Consider any two points z. = x] is increasing in x. and BS by small but non-null events. given Z I E {z. E [ g ( Z ) I Z . v is proportional to y on every T E Q n x Q n . X. the conditional density of Z given S isf(z). Let Y and Y' be the projection functions from IW2k to IWk defined by Y(z. S ] in x. f ( Y V + Y'). Instead. > z I . . then the joint distribution of W. The second inequality follows from the monotonicity of E [ g ( Z ) I Z . J.. For the converse. but is not rigorous because S is a null event. I[ z . . by the induction hypothesis. and . (i.)].I ) f(z.. z .P0l.f(Yf).

1981. Also. 194-224.. RILEY:"Auctioning an Indivisible Object. [2] CASSADY.. 87D. .. 26(1980).z') n-co = (f(z).) = c. + f(zf) + f(z V z') + f(z A z'). [9] HOLT.B. New York: Academic Press."). Multivariate Totally Positive Distributions. [6] ENGELBRECHT-WIGGANS. [13] M A ~ H E WS." Management Science. 1141 MEAD.")(X. I71 : "Estimates and Information.: "Natural Resource Disposal Policy-Oral Auction Versus Sealed Bid. M( 1967). 23(1971). [5] ENGELBRECHT-WIGGANS. J.. Harvard University. AND J." Journal of Multivariate Analysis. 201. 'x. z'). we have z.and Second-Price Auctions. or equivalently. AND Y.E." + X.. / S. c. Chung 13. By the definition of affiliation.K.: "Auctions and Bidding Models: A Survey.C."2 c i 2 ( x . 1979. tk# z. Discussion Paper No. AND R. A rearrangement of terms yields the affiliation inequalQ. 586. AND R. where c. + X.z') = 2"k(P(Qn(z)). f(z A z')) (cf. U. Price Discrimination and Bundling.: S . 433-445." Journal of Political Economy. 49(198 I).. MILGROM.A. R. P ( Q n ( z V z')). 10(1980). CLAPP. WEBER:"An Example of a Multi-Object Auction Game. JR. are increasing. [4] ENGELBRECHT-WIGGANS. for almost every (z. + X i and each XIn is evaluated at (z. any such pair. R. P(B. .: Auctions and Auctioneering. J. t') pair. and B. 25(1979). .THEORY O F AUCTIONS X n is a martingale in Ft4. JR. Letting n -+ co yields (for almost every (z." Economics Department Discussion Paper No. 1981. 641-653.. Second Ed. 1981. + X. [ l l ] MASKIN..)." CCBA Working Paper No. [lo] KARLIN. R." CMSEMS Discussion Paper No. is a sublattice. The sets A. Northwestern University.E. 119-142. RAVIV:"Allocation Mechanisms and the Design of Auctions. = Qn(z) U Qn(z') U Qn(z V z') U Qn(z A z').. I. Berkeley: University of California Press. J.4.D. A.) . University of Illinois. R. [8] HARRIS. B." Natural Resources Planning Journal. AND A.L. f ( t V z'). = { x I x Qn(z')). f(zl). S." Econometrica.) 2 P(A. Northwestern University." Journal of Petroleum Technology. R." + Xi). 1967. 1980. Each cube Q n ( t ) has a minimal element.. = ( x I x 2 min Qn(z)). 465. and thus for almost every (z. RINOTT: "Classes of Orderings of Measures and Related Correlation Inequalities. # z'. so we may define A. = X.P ( Q n ( z ' ) ) . [I21 : "Multi-Unit Auctions.. . we have P(A. and for sufficiently large n the following three identities hold: 2 min P(B. "Risk Aversion and the Efficiency of First..81). P ( Q n ( z A z')))." unpublished manuscript. AND W. For Xn(z. 1974.'(x. for sufficiently large n. I S. V. I S. I S. 1477. WEBER:"Competitive Bidding and Proprietary Information." Management Science.E.1499. z')): where c = f(z) ity. lim X n ( z . 1272-1277." JFK School of Government. M.M. REFERENCES [I] CAPEN. [3] CHUNG. P.W. 467-498. Theorem 9. C. t').: A Course in Probability Theoiy. 88(1980).: "Competitive Bidding for Contracts Under Alternative Auction Procedures. CAMPBELL: "Competitive Bidding in High-Risk Situations. R." + X.S.C. . and S.

369-384. ROTHKOPF: "Competitive Bidding: A Comprehensive Bibliography. [33] WILSON. P." Quarterly Journal of Economics. 49(198 I). 362-373.: "Comment on: David Hughart. R. Princeton University. WEBER [I§] MILGROM.: "Competitive Bidding for Offshore Petroleum Leases." Recent Advances in Game Theory (conference proceedings). 1980. 16(1961).D. 380-39 1.: "A Model of Rational Competitive Bidding." Bell Journal of Economics. [28] TOPKIS. 47(1979). L." Journal of Mathematical Economics. AND M. Bidding and Contracting: Uses and Theory. Auctions. R. M. . [22] ORTEGA-REICHERT. 15-27.1122 P. A.W.: "Optimal Auction Design. [29] VICKREY.'" (unpublished notes).: "Models for Competitive Bidding Under Uncertainty.R. WEBER:"Distributional Strategies for Games with Incomplete Information. [17] ---: "Rational Expectations. 8.: The Structure of Information in Competitive Bidding.: "Multiple-Object Auctions. 1968." Mathematics of Operations Research." Mathematics of Operations Research. 1962." Journal of Finance. 71(1981).P." American Economic Review. [sol : "Auctions and Bidding Games.. [23] REECE. 675-698. M. 26(1978). [24] RILEY. New York: New York University Press. AND W. [26] STARK. 381-392. [19] MILGROM. 1979." Journal of Applied Probability.. and Competitive Sealed Tenders. Thesis. Stanford University." Bell Journal of Economics. [21] MYERSON. 8-37." Econometrica. MILGROM AND R. 19(1982). [351 : "Auctions of Shares. [31] WEBER. SAMUELSON: "Optimal Auctions. [25] ROTHKOPF.: "Multivariate Monotone Likelihood Ratio and Uniform Conditional Stochastic Order. Department of Operations Research Technical Report No. 58-73. 27(1979). [32] WHITT.: Probability Inequalities for Multivariate Distributions. [I61 : "A Convergence Theorem for Competitive Bidding with Differential Information. K.. [I81 : "Goods News and Bad News: Representation Theorems and Applications. 6(1981). 4(1977)." Management Science. 679-688. Stanford University. [341 : "A Bidding Model of Perfect Competition.R. 15(1969). New York: Academic Press. J. 364-390." Mathematics of Operations Research.: "Counterspeculation. (forthcoming). R.R." Ph. W. 93(1979). New York: Garland Publishing Company. 92 1-943. Bidding Strategies.: "Minimizing a Submodular Function on a Lattice. [27] TONG.Y. 305-32 1." in Auctions. J." Econometrica." Review of Economics Studies.D. 9(1978). [201 : "The Value of Information in a Sealed-Bid Auction.J. forthcoming. AND R. 'Informational Asymmetry. 12(198I). H. forthcoming. and the Marketing of Offshore Petroleum Leases. R.D. M. J. forthcoming. 511-518." Operations Research. Information Acquisition and Competitive Bidding.

CO%3B2-7 8 Competitive Bidding: A Comprehensive Bibliography Robert M. Milgrom Econometrica. Information Acquisition. Vol.jstor.org/sici?sici=0012-9682%28198209%2950%3A5%3C1089%3AATOAAC%3E2. 4.. (Mar.0. No. pp. Vol. Vol. (Jul..org LINKED CITATIONS . 1981).0. 4.Apr.jstor. Weber Econometrica. 364-390. No.jstor. 49. Milgrom.jstor. Stable URL: http://links. . 2.0.CO%3B2-E This article references the following linked citations.. Stable URL: http://links. Stable URL: http://links.jstor. 1981). you may be required to first logon via your library web site to access JSTOR. 26. Robert J.org/sici?sici=0012-9682%28198107%2949%3A4%3C921%3AREIAAC%3E2. 27. 1979). Vol. (Sep.jstor. [Footnotes] 8 Auctions and Bidding Models: A Survey Richard Engelbrecht-Wiggans Management Science. Milgrom Econometrica. No.http://www. (Jul.org/sici?sici=0012-9682%28198107%2949%3A4%3C921%3AREIAAC%3E2. . 5. Michael H.org/sici?sici=0030-364X%28197903%2F04%2927%3A2%3C364%3ACBACB%3E2. Vol.CO%3B2-W 17 Rational Expectations. and Competitive Bidding Paul R. Rothkopf Operations Research. 1089-1122.org/sici?sici=0025-1909%28198002%2926%3A2%3C119%3AAABMAS%3E2. Please visit your library's website or contact a librarian to learn about options for remote access to JSTOR. pp. No.0. pp.. 921-943. Stark. (Feb.CO%3B2-6 15 Rational Expectations. 1980). Stable URL: http://links. If you are trying to access articles from an off-campus location. 49.0.CO%3B2-W NOTE: The reference numbering from the original has been maintained in this citation list. pp. 1982). Stable URL: http://links. and Competitive Bidding Paul R. Information Acquisition.Page 1 of 3 - You have printed the following article: A Theory of Auctions and Competitive Bidding Paul R. 119-142. 50. 2.. pp. 921-943. No.

3. pp. (May.. 1979). 1477-1499. (Jun. 26.0.jstor. 3. Stable URL: http://links.CO%3B2-V 16 A Convergence Theorem for Competitive Bidding with Differential Information Paul R.CO%3B2-7 6 An Example of a Multi-Object Auction Game Richard Engelbrecht-Wiggans.0.0. 49.CO%3B2-C 8 Allocation Mechanisms and the Design of Auctions Milton Harris.jstor.0.. 1979). (Feb.org LINKED CITATIONS . Stable URL: http://links. Jr. No. Holt. 1980). 119-142. . pp. No.0. Artur Raviv Econometrica. Vol. (Dec. Vol. 1272-1277. Weber Management Science. The Journal of Political Economy.jstor. No.org/sici?sici=0012-9682%28198111%2949%3A6%3C1477%3AAMATDO%3E2. 433-445. Vol. 679-688. Robert J. Stable URL: http://links. 12. 1980). 88. Stable URL: http://links. pp. Vol. Stable URL: http://links..jstor.http://www. 47.Page 2 of 3 - References 4 Auctions and Bidding Models: A Survey Richard Engelbrecht-Wiggans Management Science.CO%3B2-5 9 Competitive Bidding for Contracts under Alternative Auction Procedures Charles A. No. pp. No.org/sici?sici=0012-9682%28197905%2947%3A3%3C679%3AACTFCB%3E2. pp. 2.org/sici?sici=0025-1909%28197912%2925%3A12%3C1272%3AAEOAMA%3E2.. (Nov. 6.CO%3B2-X NOTE: The reference numbering from the original has been maintained in this citation list.jstor. Milgrom Econometrica.jstor. 1981). Vol.org/sici?sici=0025-1909%28198002%2926%3A2%3C119%3AAABMAS%3E2. 25.org/sici?sici=0022-3808%28198006%2988%3A3%3C433%3ACBFCUA%3E2.

org LINKED CITATIONS .CO%3B2-W 24 Optimal Auctions John G.jstor.0. 3. 1969). Samuelson The American Economic Review. 362-373. 1981). Vol. Vol. Vol. (Jun.org/sici?sici=0012-9682%28198107%2949%3A4%3C921%3AREIAAC%3E2.jstor. No. Riley. 2.0. and Competitive Sealed Tenders William Vickrey The Journal of Finance. Stable URL: http://links.org/sici?sici=0030-364X%28197903%2F04%2927%3A2%3C364%3ACBACB%3E2. (Sep. No. 695-701. No.0... Stark. (Mar. Vol. Vol.jstor. 381-392. 16.org/sici?sici=0025-1909%28196903%2915%3A7%3C362%3AAMORCB%3E2.jstor. No.. pp. Rothkopf Management Science.CO%3B2-L 32 Multivariate Monotone Likelihood Ratio and Uniform Conditional Stochastic Order Ward Whitt Journal of Applied Probability.jstor.Page 3 of 3 - 17 Rational Expectations.CO%3B2-T 25 A Model of Rational Competitive Bidding Michael H. pp. 49. pp. No. Information Acquisition. Stable URL: http://links. 1961). Auctions. .Apr. Stable URL: http://links.0. Theory Series. (Mar. Michael H. 27. 364-390.0.CO%3B2-R NOTE: The reference numbering from the original has been maintained in this citation list.. 19. Vol. 7.jstor.org/sici?sici=0002-8282%28198106%2971%3A3%3C381%3AOA%3E2.org/sici?sici=0021-9002%28198209%2919%3A3%3C695%3AMMLRAU%3E2. pp. 8-37.. pp.CO%3B2-R 26 Competitive Bidding: A Comprehensive Bibliography Robert M. 921-943.http://www. Rothkopf Operations Research. William F. Stable URL: http://links. 3.0. Stable URL: http://links.org/sici?sici=0022-1082%28196103%2916%3A1%3C8%3ACAACST%3E2. . 1979). 71. and Competitive Bidding Paul R. (Mar. 1982).. 1.jstor. 1981). 4. (Jul. No. Milgrom Econometrica. 15. pp. Stable URL: http://links.CO%3B2-6 29 Counterspeculation.

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