Endogenous Competition Alters the Structure of Optimal Auctions

Ronald Harstad

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

Abstract: Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Seller's surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.

Date: 2011-09
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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