Auctions vs. Sequential Mechanisms When Resale is Allowed

We examine the problem of selling an object to a stream of potential buyers with independent private values and participation costs. If the object can be resold in the future, and resellers can make posted price offers, the original seller may prefer to deal with potential buyers sequentially instead of holding an auction. The reason is that resale opportunities compress the dispersion of buyers’ willingness to pay for the object, which lowers the surplus each buyer expects to receive in the auction. This effect may reduce participation in the initial auction to just one buyer, in which case the seller obtains zero revenue. We show that a simple form of sequential mechanism allows the seller to extract positive revenue, and becomes approximately optimal if the resale market is large. Our finding contrasts with the result that sellers usually prefer auctions when resale is not allowed (see Bulow and Klemperer 2009)