Competing Auctions in Intermediated Markets

Abstract

We analyze competing auctions in intermediated markets, where a seller selects among parallel mechanisms for the sale of a single good, most prominently the relay-and-protocol architecture of proposer-builder separation in Ethereum.
When the intermediary can enforce single-homing on its bidders, sealed-bid second-price intermediary auctions fully unravel into the sealed first-price principal auction; open bidding-format intermediaries unravel only partially, collapsing into first-price in equilibrium under symmetric latency and sorting fast bidders to the intermediary under asymmetric latency. Any last-look advantage is removed through the availability of a credible sealed bidding channel. These results extend to multi-plexing environments (no enforcement by the intermediary).
While the unraveling result indicates that the availability of a sealed first-price bidding channel pushes the overall market to the same auction structure, the very assumption of the credibility of such a channel is problematic, as the seller may have an incentive to leak information: a first-price auction is leakage-resistant in the presence of a single "fast" bidder but not against two or more. However, if the seller can credibly commit to not leak bids, it is optimal for them to do so. 
A main motivation is the forthcoming Glamsterdam update of Ethereum: our analysis suggests that the availability of an in-protocol (first-price) bidding channel severely limits the design space for out-of-protocol auctions by relays and other intermediaries.