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A Note on Auctions with Endogenous Participation

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Author Info

  • Flavio Menezes

    (Australian National University)

  • Paulo Klinger Monteiro

    (Impa)

Abstract

In this paper, we study an auction where bidders only know the number of potential applicants. After seeing their values for the object, bidders decide whether or not to enter the auction. Players may not want to enter the auction since they have to pay participation costs. We characterize the optimal bidding strategies for both first- and second- price sealed-bid auction when participation is endogenous. We show that only bidders with values greater than a certain cut-off point will bid in these auctions. In this context, both auctions generate the same expected revenue. We also show that, contrarily to the predictions of the fixed-$n$ literature, the seller's expected revenue may not increase when the number of potential participants increases. In addition, we show that it is optimal for the seller to charge an entry fee, which contrast greatly with results from the existing literature on auctions with entry.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9610003.

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Length: 16 pages
Date of creation: 22 Oct 1996
Date of revision: 31 Oct 1996
Handle: RePEc:wpa:wuwpmi:9610003

Note: Type of Document - latex file; prepared on textures; to print on postscript; pages: 16
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Web page: http://128.118.178.162

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Keywords: auction; endogenous participation;

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References

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  1. 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.
  2. Engelbrecht-Wiggans Richard, 1993. "Optimal Auctions Revisited," Games and Economic Behavior, Elsevier, vol. 5(2), pages 227-239, April.
  3. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  4. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  5. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
  7. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  8. Holt, Charles A, Jr, 1979. "Uncertainty and the Bidding for Incentive Contracts," American Economic Review, American Economic Association, vol. 69(4), pages 697-705, September.
  9. 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.
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Cited by:
  1. Decio Coviello & Mario Mariniello, 2008. "Does Publicity Affect Competition? Evidence from Discontinuities in Public Procurement Auctions," CSEF Working Papers 189, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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