The Winner's Bliss in Common-Value Auctions under Horizontal Differentiation

2026-06-06

AI Summary

This study challenges the conventional “winner’s curse” hypothesis by investigating why winners in common-value auctions exhibit optimistic valuations under horizontally differentiated preferences. By developing a two-bidder game-theoretic model, the paper introduces the novel concept of “winner’s joy,” demonstrating that winning itself conveys a positive signal about the item’s value. Theoretical analysis reveals that, under horizontal preference differentiation, greater information disclosure paradoxically reduces seller revenue, whereas a mechanism based on advantageous selection sustains bilateral trade even under asymmetric information. These findings overturn established views on the role of information and trading mechanisms in common-value auctions, offering fresh insights for auction design and market mechanism theory.

Abstract

We study common-value auctions in which bidders have horizontally differentiated preferences. In a specific two-bidder parameterization, winning conveys good news about the object's value to the winner, a phenomenon we call the winner's bliss in contrast to the conventional winner's curse. Additional implications also differ from the conventional analysis. When bidders' preferences are horizontally differentiated, seller revenue is reduced with information disclosure, and advantageous selection sustains bilateral trade under asymmetric information.

Problem

• common-value auctions
• horizontal differentiation
• winner's bliss
• winner's curse
• information disclosure

Innovation

• common-value auctions
• horizontal differentiation
• winner's bliss
• information disclosure
• advantageous selection