Dealing with an Auction

Given that the art dealer seeks to extend his regular business as owner of a gallery by organizing an auction, this thesis attempts to find the optimal auction mechanism by comparing the traditional oral ascending English auction with the second‐price sealed‐bid Vickrey auction. The thesis starts by defining the art market, after which the art dealer’s strategy is compared with the auction house’s strategy. The main findings are that (1) theoretical and empirical arguments support both the English and Vickrey auction in terms of revenue; (2) the Vickrey auction suits the art dealer’s strategy, whereas the English auction opposes it; and (3) existing collusive models encourage freerider behavior. This thesis proposes a compensation scheme that redistributes ring earnings fairly, discouraging free‐rider behavior at the cost of not being incentive‐compatible. In conclusion, the art dealer prefers the Vickrey over the English auction.