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Rational Participation Revolutionizes Auction Theory

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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 a participation cost (and observe a private signal), or forego 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 for any common-value auction. 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.

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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0518.

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Length: 41 pgs.
Date of creation: 07 Dec 2005
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Handle: RePEc:umc:wpaper:0518

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Keywords: Optimal Auctions; Endegenous Bidder Participation; Affiliated-Values; Common-Value Auctions; Surplus-Extracting Devices;

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References

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  1. Rothkopf, Michael H & Harstad, Ronald M, 1995. "Two Models of Bid-Taker Cheating in Vickrey Auctions," The Journal of Business, University of Chicago Press, vol. 68(2), pages 257-67, April.
  2. Ronald M. Harstad & Michael H. Rothkopf, 2000. "An "Alternating Recognition" Model of English Auctions," Management Science, INFORMS, vol. 46(1), pages 1-12, January.
  3. Harstad, Ronald M. & Kagel, John H. & Levin, Dan, 1990. "Equilibrium bid functions for auctions with an uncertain number of bidders," Economics Letters, Elsevier, vol. 33(1), pages 35-40, May.
  4. Paul R. Milgrom, 1978. "Rational Expectations," Discussion Papers 406, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics 0004008, EconWPA.
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  7. Klemperer, Paul, 1999. "Auction Theory: a Guide to the Literature," CEPR Discussion Papers 2163, C.E.P.R. Discussion Papers.
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  9. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
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  24. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  25. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
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  27. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-46, May.
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Cited by:
  1. Ronald M. Harstad & Vlad Mares, 2005. "Ex-Post Full Surplus Extraction, Straightforwardly," Working Papers 0515, Department of Economics, University of Missouri.

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