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Leandro Arozamena, Nicholas Shunda and Federico Weinschelbaum
 
''Optimal nondiscriminatory auctions with favoritism''
( 2014, Vol. 34 No.1 )
 
 
In many auction settings, there is favoritism: the seller's welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We find the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue.
 
 
Keywords: auctions, favoritism, nondiscriminatory mechanisms
JEL: C7 - Game Theory and Bargaining Theory:General
D4 - Market Structure and Pricing: General
 
Manuscript Received : Oct 18 2013 Manuscript Accepted : Feb 11 2014

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