How To Sell (or Procure) in a Sequential Auction

Abstract

A seller with one unit of a good faces N\geq3 buyers and a single competitor who sells one other identical unit in a second-price auction with a reserve price. Buyers who do not get the seller's good will compete in the competitor's subsequent auction. We characterize the optimal mechanism for the seller in this setting. The first-order approach typically fails, so we develop new techniques. The optimal mechanism features transfers from buyers with the two highest valuations, allocation to the buyer with the second-highest valuation, and a withholding rule that depends on the highest two or three valuations. It can be implemented by a modified third-price auction or a pay-your-bid auction with a rebate. This optimal withholding rule raises significantly more revenue than would a standard reserve price. Our analysis also applies to procurement auctions. Our results have implications for sequential competition in mechanisms.