Dynamic Threats to Credible Auctions

A seller wants to sell an item to a set of bidders using a credible mechanism. We show that when the seller has private information about her cost, it is not possible to implement the optimal mechanism using a static mechanism. As we show, even the optimal first-price auction is no longer credible. We show that optimality requires a dynamic mechanism and that the English auction can be used to credibly implement the optimal mechanism. In contrast, we show that the Dutch auction may not be credible. We characterize all symmetric static auctions that are credible: They are first-price auctions that depend on the seller’s cost in a minimal way via a secret reserve and may profitably involve pooling of bidders via a bid restriction.