Auction design with ambiguity: Optimality of the first-price auction

We study the optimal auction design problem when bidders are ambiguity averse and follow the max-min expected utility model. Each bidder’s set of priors consists of beliefs that are close to the seller’s belief, where “closeness” is defined by a divergence. For a given allocation rule, we show that optimal transfers belong to a specific class of transfers, termed win-lose dependent transfers, in which bidders’ transfers upon winning and losing depend only on their own types but not on their opponents’ type reports. This result effectively reduces the infinite-dimensional problem of identifying an optimal transfer function into a two-dimensional problem of determining two constants-one for winning and another for losing. Solving this reduced problem, we show that among efficient mechanisms without transfers to losing bidders, the first-price auction is optimal, thereby outperforming other auction formats such as the second-price auction. We also discuss how the structure of the set of priors is related to the revenue ranking between the first- and second-price auctions.