Optimal Exclusive Dealing Through a Distribution Channel in Auctions with Stochastic Bidder Participation

Abstract

This paper endogenizes exclusive dealing through a distribution channel in auction markets. In particular, it is demonstrated that a seller prefers to exclude final consumers and sell only to re-sellers when these resellers can gain access, at a cost, to a sufficiently bigger market than the seller himself. The intuition behind this result is that the re-sellers can recoup their expenses for marketing the item by re-selling it to the final consumers. If some of the consumers participate in the first auction and are outbid by the resellers, this is an indication that their values for the item are relatively low. Outbidding part of their customer base is 'bad news' for the resellers, and this depresses their bids when final consumers compete with them. The socially optimal and revenue maximizing choices of auction format may not coincide. It is possible that restricting participation of consumers is socially optimal but privately sub-optimal and vice-versa. The results of this paper suggest that (i) the exclusion of final consumers in some auctions may not be driven by transaction costs considerations, and (ii) sellers should not necessarily sell directly to consumers even though new technologies, such as electronic/ Internet trading, allow them to do so at essentially zero cost.