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Article Excerpt
Summary. Bulow and Klemperer [1] have provided an upper bound on the value of bargaining power for a seller of an indivisible object. Specifically, negotiating optimally with N buyers yields lower revenue than an English auction with N + 1 buyers. In this paper, a short and intuitive proof of this result is presented.
Keywords and Phrases: Auctions, Negotiations, Rationing.
JEL Classification Numbers: C78, D44, D82.
Bulow and Klemperer [1] examine the value of bargaining power for the seller of an indivisible good. At best, the seller can use his bargaining power to negotiate optimally and attain the fully optimal revenue. (1) On the other hand, running an English auction with no reserve price demands no bargaining power on the part of the seller. With symmetric buyers, Bulow and Klemperer [1] show that the English auction with N + 1 buyers yields strictly higher revenue than an optimal mechanism with N buyers. Hence, the value of bargaining power is bounded above by the value of an extra buyer. The aim of this paper is to provide a new, intuitive proof of this result.
Thus, consider a risk neutral seller with an indivisible object for sale, and normalize to zero the value the seller puts on consuming the good himself. The seller's objective is to maximize revenue. In the following, a mechanism that maximizes revenue among all mechanisms in which the object is sold...
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