Costly Auction Entry, Royalty Payments, and the Optimality of Asymmetric Designs

45 Pages Posted: 27 Aug 2018 Last revised: 31 Oct 2019

See all articles by Dan Bernhardt

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Tingjun Liu

The University of Hong Kong

Takeharu Sogo

SKEMA Business School; Université Côte d'Azur

Date Written: June 30, 2019

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, Security-Bid Auctions, Optimal Auctions, Asymmetric Auctions

JEL Classification: D44, G3

Suggested Citation

Bernhardt, Dan and Liu, Tingjun and Sogo, Takeharu, Costly Auction Entry, Royalty Payments, and the Optimality of Asymmetric Designs (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3233573 or http://dx.doi.org/10.2139/ssrn.3233573

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Tingjun Liu

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Takeharu Sogo (Contact Author)

SKEMA Business School ( email )

Lille
France

Université Côte d'Azur ( email )

France

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