To what extent do prices formed in natural trading modes aggregate dispersed information? This was the leading question of the presentation Professor Asher Wolinsky held at ISET on September 9, 2013. The presentation was based on the joint work of Stephan Lauermann and Asher Wolinsky.
Professor Wolinsky, from Northwestern University (USA), began his talk by explaining the significance of the question posed above. He presented a model with two types of players – one seller and N potential buyers – who are acting in different states (the state can be also interpreted as the seller’s type). Each of the states has prior probabilities and the true state is the private information of the seller.
Buyers, who have a common value, are observing signals on the state. Professor Wolinsky used three distinct scenarios for explaining the information aggregation mechanism: an ordinary first-price auction; a sequential search; and an auction with endogenous bid solicitation/simultaneous search.
After solving the model in three different situations, the presenter drew several conclusions. The main qualitative insight is that endogenous solicitation, which arises naturally in certain trading scenarios, affects information aggregation by prices. An informed seller of a lower type solicits more buyers and so gives rise to a solicitation effect – a change in base probabilities – that mitigates the signal effect. But sometimes endogenous solicitation might work in the other direction. In the partially revealing equilibrium of the auction with bidder solicitation when specific conditions hold, prices aggregate information better than in the ordinary auction.
Due to the interesting content and numerous questions from the audience, the presentation lasted longer than intended and the students expressed their desire to invite Asher Wolinsky for another presentation in the future.
ISET would like to thank Professor Wolinsky for presenting a very interesting, informative, and useful seminar to the ISET community.