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Endogenous Competition Alters the Structure of Optimal Auctions

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  • Ronald M Harstad

Abstract

Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Seller's surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.

Suggested Citation

  • Ronald M Harstad, 2011. "Endogenous Competition Alters the Structure of Optimal Auctions," ISER Discussion Paper 0816, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0816
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2011/DP0816.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ronald M. Harstad, 2007. "Does a Seller Really Want Another Bidder?," Working Papers 0711, Department of Economics, University of Missouri.

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