Descending Price Optimally Coordinates Search

TL;DR

This paper demonstrates that descending price auctions, like Dutch auctions, effectively coordinate search under uncertainty, reducing social losses compared to standard auction formats that cause inefficient information gathering.

Contribution

It shows that Dutch auctions preserve desirable properties under information costs, improving search efficiency and reducing social losses in auction settings.

Findings

Dutch auctions guarantee purchase prices during search

Standard auctions lead to wasteful information acquisition

Social losses from poor search coordination are significantly high

Abstract

Investigating potential purchases is often a substantial investment under uncertainty. Standard market designs, such as simultaneous or English auctions, compound this with uncertainty about the price a bidder will have to pay in order to win. As a result they tend to confuse the process of search both by leading to wasteful information acquisition on goods that have already found a good purchaser and by discouraging needed investigations of objects, potentially eliminating all gains from trade. In contrast, we show that the Dutch auction preserves all of its properties from a standard setting without information costs because it guarantees, at the time of information acquisition, a price at which the good can be purchased. Calibrations to start-up acquisition and timber auctions suggest that in practice the social losses through poor search coordination in standard formats are an order of magnitude or two larger than the (negligible) inefficiencies arising from ex-ante bidder asymmetries.