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Auctions with heterogeneous entry costs

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  • Diego Moreno

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  • John Wooders

    ()

Abstract

We study the impact of public and secret reserve prices in auctions where buyers have independent private values and heterogeneous entry costs. We find that in a standard auction the optimal (i.e., revenue maximizing) public reserve price is typically above the seller's value. Moreover, an appropriate entry fee together with a public reserve price equal to the seller's value generates greater revenue. Secret reserve prices, however, differ across auction formats. In a second-price sealed-bid auction the secret reserve price is above the optimal public reserve price; hence there is less entry, a smaller probability of sale, and both the seller revenue and the bidders' utility are less than with an optimal public reserve price. In contrast, in a first-price sealed-bid auction the secret reserve is equal to the seller's value, and the bidders' expected utility (seller revenue) is greater (less) than with an optimal public reserve price.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we061806.

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Date of creation: Jan 2006
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Handle: RePEc:cte:werepe:we061806

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Keywords: Standard auctions; Endogenous entry; Heterogenous entry costs; Public reserve; Secret reserve;

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References

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  1. Vincent Daniel R., 1995. "Bidding Off the Wall: Why Reserve Prices May Be Kept Secret," Journal of Economic Theory, Elsevier, Elsevier, vol. 65(2), pages 575-584, April.
  2. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers, UCLA Department of Economics 152, UCLA Department of Economics.
  3. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, Elsevier, vol. 17(1-2), pages 53-57.
  4. Green, Jerry & Laffont, Jean-Jacques, 1984. "Participation constraints in the vickrey auction," Economics Letters, Elsevier, Elsevier, vol. 16(1-2), pages 31-36.
  5. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 585-99, June.
  7. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Ye Lixin, 2004. "Optimal Auctions with Endogenous Entry," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 4(1), pages 1-29, October.
  9. Ashenfelter, Orley, 1989. "How Auctions Work for Wine and Art," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(3), pages 23-36, Summer.
  10. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, Elsevier, vol. 23(4), pages 343-347.
  11. Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 27, Institut d'Économie Industrielle (IDEI), Toulouse.
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Citations

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Cited by:
  1. Xu, Xiaoshu & Levin, Dan & Ye, Lixin, 2013. "Auctions with entry and resale," Games and Economic Behavior, Elsevier, Elsevier, vol. 79(C), pages 92-105.
  2. Kevin Hasker & Robin Sickles, 2010. "eBay in the Economic Literature: Analysis of an Auction Marketplace," Review of Industrial Organization, Springer, Springer, vol. 37(1), pages 3-42, August.
  3. Dakshina De Silva & Thomas Jeitschko & Georgia Kosmopoulou, 2009. "Entry and Bidding in Common and Private Value Auctions with an Unknown Number of Rivals," Review of Industrial Organization, Springer, Springer, vol. 35(1), pages 73-93, September.
  4. Lu, Jingfeng & Ye, Lixin, 2013. "Efficient and optimal mechanisms with private information acquisition costs," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(1), pages 393-408.

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