DP4678 Creating Competition Out of Thin Air: Market Thickening and Right-to-Choose Auctions

Author(s): Kfir Eliaz , Theo Offerman , Andrew Schotter

Publication Date: October 2004

Keyword(s): Right-to-Choose Auctions , Experimental auctions , Behavioural Mechanism-Design

JEL(s): C91 , D44

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP4678.asp

We study a procedure for selling multiple heterogenous goods, which is commonly used in practice but rarely studied in the literature. The novel feature of this procedure is that instead of selling the goods themselves, the seller offers buyers the right to choose among the available goods. Thus, buyers who are after completely different goods are forced to compete for the same good, the ‘right to choose’. Competition can be further enhanced by restricting the number of rights that are sold. This is shown both theoretically and experimentally. Our main experimental finding is that by auctioning ‘rights-to-choose’ rather than the goods themselves, the seller induces an aggressive bidding behaviour that generates more revenue than the theoretical optimal mechanism.