Auctions with a Profit Sharing Contract

Vineet Abhishek; Bruce Hajek; Steven R. Williams

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arXiv · 1102.3195

Auctions with a Profit Sharing Contract

Vineet Abhishek·Bruce Hajek·Steven R. Williams

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Abstract

We study the problem of selling a resource through an auction mechanism. The winning buyer in turn develops this resource to generate profit. Two forms of payment are considered: charging the winning buyer a one-time payment, or an initial payment plus a profit sharing contract (PSC). We consider a symmetric interdependent values model with risk averse or risk neutral buyers and a risk neutral seller. For the second price auction and the English auction, we show that the seller's expected total revenue from the auction where he also takes a fraction of the positive profit is higher than the expected revenue from the auction with only a one-time payment. Moreover, the seller can generate an even higher expected total revenue if, in addition to taking a fraction of the positive profit, he also takes the same fraction of any loss incurred from developing the resource. Moving beyond simple PSCs, we show that the auction with a PSC from a very general class generates higher expected total revenue than the auction with only a one-time payment. Finally, we show that suitable PSCs provide higher expected total revenue than a one-time payment even when the incentives of the winning buyer to develop the resource must be addressed by the seller.

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Vineet Abhishek, Bruce Hajek, Steven R. Williams. 2012-07-26. Auctions with a Profit Sharing Contract. https://arxiv.org/abs/1102.3195

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