Rational Participation Revolutionizes Auction Theory

Ronald Harstad

No 504, Working Papers from Department of Economics, University of Missouri

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 a participation cost (and observe a private signal), or forego 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 for any common-value auction. Characterization of optimal auctions is otherwise contentless, in that any auction that sells without reserve is within the setting of one continuous parameter of an optimal auction; seller's surplus-extracting tools are now substitutes, not complements. Revenue comparisons from the exogenous-bidders literature are upheld in a half-space of parameters, overturned in a half-space. Many econometric studies of auction markets are seen to be flawed in their identifcation of the number of bidders.

Keywords: optimal auctions; endegenous bidder participation; affiliated-values; common-value auctions; surplus-extracting devices (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 (search for similar items in EconPapers)
Pages: 40 pgs.
Date: 2005-05-10
New Economics Papers: this item is included in nep-com, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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