Optimal mediated auctions with endogenous participation

The majority of academic papers on the Internet auction design do not distinguish between the auctioneer and the object owner, whereas nowadays leading Internet auction websites operate primarily as mediators that provide the platforms with no physical possessions of the auction objects. The role separation between the auctioneer and the object owner (seller) creates both incentive misalignment and information asymmetry issues. In this paper, we acknowledge this role separation and study the optimal (revenue-maximizing) auction mechanism from the mediator's perspective, taking into account the costly participation from both the sellers and the buyers. We show that the mechanism induces participation from low-valuation sellers and high-valuation buyers. Compared with the conventional seller-optimal auction, the seller in the mediator-optimal mechanism keeps the object more frequently ex post because the mediator intentionally compensates the seller for withholding the object. This exacerbated ex post allocative inefficiency also gives rise to too little ex ante participation for both the seller and the buyers. We propose a simple two-stage mechanism for implementation that is reminiscent of some widely observed Internet auctions. Our qualitative results are robust against model variations such as heterogeneous participation costs, multiple units, and multiple sellers. (C) 2012 Elsevier B.V. All rights reserved.