Optimal Hotelling Auctions
Paper joint with Simon Loertscher
Abstract: Horizontally differentiated goods are typically auctioned independently. When are independent auctions optimal, and what is the optimal selling mechanism otherwise? For a Hotelling setting where a seller auctions units of two goods at each end of the interval to risk-neutral buyers with linear transportation costs and privately known locations, we show that lottery-augmented auctions are optimal whenever independent auctions are not. These auctions—which enter some buyers into a lottery over both goods—are implementable in dominant strategies via two-stage clock auctions with participation fees. With free disposal, consumer surplus increases discontinuously as the optimal mechanism transitions from independent to lottery-augmented auctions.