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Favoritism in Auctions: A Mechanism Design Approach

The auction designer has one favorite among bidders and maximizes his utility by choosing an auction format. To prevent favoritism, several restrictions are imposed on the designer. I show that even if the designer is restricted to using anonymous and dominant strategy incentive compatible auctions, for any allocation rule she can transfer all potential revenue to her favorite and guarantee him the interim utility at least equal to his value. The equivalence of anonymity with respect to bids and anonymity with respect to true values is also established in this case. When the non-positive transfers restriction is added, the auction choice still depends on the favorite’s value. The designer chooses a second-price auction with pooling, where she commits to not distinguishing values in pooling regions and using lotteries to determine a winner. To fully prevent favoritism, the deterministic auctions restriction is added. Altogether, these restrictions allow implementing only a specific class of second-price auctions with a generalized reserve price. For each bidder, this reserve price depends on other bids. The designer chooses the standard second-price auction from this class and no favoritism is possible.