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Bidder Solicitation, Adverse Selection, and the Failure of Competition

Stephan Lauermann and Asher Wolinsky

American Economic Review, 2017, vol. 107, issue 6, 1399-1429

Abstract: We study a common value, first-price auction in which the number of bidders is endogenous: the seller (auctioneer) knows the value and solicits bidders at a cost. The number of bidders, which is unobservable, may thus depend on the true value. Therefore, being solicited conveys information. This solicitation effect may soften competition and impede information aggregation. Under certain conditions, there is an equilibrium in which the seller solicits many bidders, yet the resulting price is not competitive and fails to aggregate any information. More broadly, these ideas are relevant for markets with adverse selection in which informed traders initiate contacts.

JEL-codes: D44 D82 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20131057
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Handle: RePEc:aea:aecrev:v:107:y:2017:i:6:p:1399-1429