Raising Bidders' Awareness in Second-Price Auctions

TL;DR

This paper examines how raising bidders' awareness of object characteristics affects second-price auction outcomes, considering unawareness, entry fees, and the trade-offs involved in information disclosure.

Contribution

It introduces a model analyzing the impact of characteristic awareness on auction strategies and outcomes, including optimal entry fees and awareness effects.

Findings

Optimal entry fees account for unawareness rents.

Raising awareness influences the probability of winning and auction revenue.

Trade-offs exist between increasing awareness and unawareness rents.

Abstract

When bidders bid on complex objects, they might be unaware of characteristics effecting their valuations. We assume that each buyer's valuation is a sum of independent random variables, one for each characteristic. When a bidder is unaware of a characteristic, he omits the random variable from the sum. We study the seller's decision to raise bidders' awareness of characteristics before a second-price auction with entry fees. Optimal entry fees capture an additional unawareness rent due to unaware bidders misperceiving their probability of winning and the price to be paid upon winning. When raising a bidder's individual awareness of a characteristic with positive expected value, the seller faces a trade-off between positive effects on the expected first order statistic and unawareness rents of remaining unaware bidders on one hand and the loss of the unawareness rent from the newly aware bidder on the other. We present characterization results on raising public awareness together with no versus full information. We discuss the winner's curse due to unawareness of characteristics.