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

Dan Bernhardt, Tingjun Liu and Takeharu Sogo
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Tingjun Liu: The University of Hong Kong

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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: 2019
New Economics Papers: this item is included in nep-com, nep-des, nep-exp, nep-gth, nep-ipr, nep-mic, nep-ore and nep-reg
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Journal Article: Costly auction entry, royalty payments, and the optimality of asymmetric designs (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1200

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