Exclusive dealing through resellers in auctions with stochastic bidder participation

This paper demonstrates that a seller prefers to exclude final consumers from an auction and sell only to resellers when these resellers can gain access, at a cost to a sufficiently bigger market than the seller himself. The intuition is that resellers recoup their expenses for marketing the item by reselling it to final consumers. If some consumers participate in the first auction and are outbid by the resellers, then 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 consumers compete with them. The socially optimal and revenue-maximizing choices of auction format may not coincide: Restricting participation of consumers may be socially optimal but privately suboptimal and vice-versa. The results suggest that (i) the exclusion of final consumers in some auctions may not be driven by transaction cost considerations, and (ii) sellers should not necessarily sell directly to consumers, even though new technologies allow them to do so at essentially zero cost, unless they can access a sufficiently large portion of the market.