Optimal auctions with asymmetric financial externalities

Abstract

This paper studies optimal auction design with asymmetric linear financial externalities among bidders. When the matrix γ that relates bidders' payoffs to their payments is nonsingular, the payment-related component in the design objective must equal a unique linear combination of its counterparts in bidder's payoffs. If all multipliers of the linear combination are nonnegative, a modified Myerson procedure is discovered for deriving the optimal design. If any multiplier is negative, an arbitrarily high value can be achieved for design objective by setting proper fixed transfers to bidders. When the matrix γ is singular, the unbounded optimum result typically prevails. We applied our method to auctions with cross shareholdings and charity auctions for revenue-maximizing and efficient designs. © 2011 Elsevier Inc.