Costly Entry and the Optimality of Asymmetric Auction Designs

26 Pages Posted: 27 Aug 2018

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

Osaka University of Economics

Date Written: August 17, 2018

Abstract

We investigate optimal auction mechanisms when bidders base costly entry decisions on their valuations, and payments depend on both the bids and asset payoffs generated by the winning bidder. We show the optimal mechanism can feature asymmetry, where the seller sets differential reserve prices so that bidders enter with strictly positive but different (ex-ante) probabilities, even when bidders are ex-ante identical. The optimality of asymmetric mechanisms extends to cash auctions when there is sufficient valuation uncertainty relative to entry costs. When bidders pay with a fixed royalty rate plus cash, the optimal degree of asymmetry rises with the royalty rate.

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 Entry and the Optimality of Asymmetric Auction Designs (August 17, 2018). 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)

Osaka University of Economics ( email )

2-2-8 Osumi
Higashiyokogawa-ku
Osaka
Japan

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