COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1600

An Ascending Auction for Interdependent Values:
Uniqueness and Robustness to Strategic Uncertainty

Dirk Bergemann and Stephen Morris

Updated: March 2007

We consider an single object auction environment with interdependent valuations and a generalized Vickrey–Clark–Groves allocation mechanism that allocates the object almost efficiently in a strict ex post equilibrium. If there is a significant amount of interdependence, there are multiple rationalizable outcomes of this direct mechanism and any other mechanism that allocates the object almost efficiently. This is true whether the agents know about each others' payoff types or not.

We consider an ascending price dynamic version of the generalized VCG mechanism. When there is complete information among the agents of their payoff types, we show that the almost efficient allocation is the unique backward induction (i.e., extensive form rationalizable) outcome of the auction, even when there are multiple rationalizable outcomes in the static version. This example illustrates the role that open auctions may play in obtaining efficient allocations by reducing strategic uncertainty.

Keywords: Dynamic auction, Rationalizability, Extensive form, Uniqueness, Strategic uncertainty

JEL Classification: C79, D82