SFB 303 Discussion Paper No. B-288

Author: Jehiel, Philippe, Benny Moldovanu, and Ennio Stacchetti
Title: How (not) to sell nuclear weapons
Abstract: We study the problem of a seller who wants to maximize her revenue in situations where the outcome of the sale affects the nature of the future interaction between agents. We model those situations by assuming that an agent that does not acquire the object for sale incurs an externality that may depend both on the identity of the sufferer and on the identity of the final purchaser. We describe an optimal auction that has a unique Nash equilibrium in strictly dominant strategies. We show that: 1) Ouside options are endogenously determined in equilibrium. Participation constraints and the "threats" in case of non-participation play an important role. 2) An optimizing seller can extract surplus also from buyers that do not optain the auctioned object. 3) The seller is better off by not selling at all (while obtaining some payments) if externalities are large when compared to the pure profits that buyers achieve if they acquire the object. 4) The revenue-maximizing equilibrium is coalition-proof if buyers cannot organize side payments among themselves.
Creation-Date: June 1994
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