Peaches, lemons, and cookies: Designing auction markets with dispersed information

We study how ex ante information asymmetries affect revenue in common-value second-price auctions, motivated by online advertising auctions where “cookies” inform individual advertisers about advertising opportunities. We distinguish information structures in which cookies identify “lemons” (low-value impressions) from those in which cookies identify “peaches” (high-value impressions). As this setting features multiple Nash equilibria, we introduce a new refinement, “tremble robust equilibrium” (TRE) and characterize the unique TRE in first-price and second-price common-value auctions with two bidders who each receive a binary signal. We find that common-value second-price auction revenues are vulnerable to ex ante information asymmetry if relatively rare cookies identify lemons, but not if they identify peaches. First-price auction revenues are substantially higher than second-price auction revenues under these conditions. Extensions show that these insights are robust.