Costly auction entry, royalty payments, and the optimality of asymmetric designs

Dan Bernhardt, Tingjun Liu and Takeharu Sogo

Journal of Economic Theory, 2020, vol. 188, issue C

Abstract: We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more.

Keywords: Auctions with participation costs; Royalty payments; Optimal auctions; Asymmetric auctions; Heterogeneous bidders (search for similar items in EconPapers)
JEL-codes: D44 G3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053118305118
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Costly auction entry, royalty payments, and the optimality of asymmetric designs (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:188:y:2020:i:c:s0022053118305118

DOI: 10.1016/j.jet.2020.105041

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().