Peaches, Lemons, and Cookies: Designing Auction Markets with Dispersed Information

Résumé

We study the effect of ex-ante information asymmetries on revenue in common-value secondprice auctions (SPA). The motivating application of our results is to online advertising auctions in the presence of \cookies," which allow individual advertisers to recognize advertising opportunities (impressions) for users who, for example, are existing customers. Cookies create substantial information asymmetries both ex ante and at the interim stage, when advertisers form their beliefs. We distinguish information structures in which cookies identify \lemons" (low value impressions) from those in which cookies identify \peaches" (high value impressions). To make progress in a setting with multiple Nash equilibria, we first introduce a new refinement, \tremble robust equilibrium" (TRE). We then characterize the unique TRE in both first-price and second-price common-value auctions with two bidders who each receive binary signals. This generates two novel insights. First, common-value second-price auction revenues are vulnerable to ex ante asymmetry if relatively rare cookies identify lemons, but not if they identify peaches. Second, first-price auction revenues are substantially higher than second-price auction revenues under the same conditions. Two extensions show that these insights are robust in settings with more than two bidders and richer signal structures. Finally, we consider revenue maximization in a richer setting with a private component to valuations.