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A Note on Auctions with Endogenous Participation

Author

Listed:
  • 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.

Suggested Citation

  • Flavio Menezes & Paulo Klinger Monteiro, 1996. "A Note on Auctions with Endogenous Participation," Microeconomics 9610003, University Library of Munich, Germany, revised 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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    References listed on IDEAS

    as
    1. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
    2. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
    3. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-646, May.
    4. 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.
    5. 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.
    6. 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.
    7. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    8. Engelbrecht-Wiggans Richard, 1993. "Optimal Auctions Revisited," Games and Economic Behavior, Elsevier, vol. 5(2), pages 227-239, April.
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    Cited by:

    1. Decio Coviello & Mario Mariniello, 2008. "Does Publicity Affect Competition? Evidence from Discontinuities in Public Procurement Auctions?," Economics Working Papers ECO2008/04, European University Institute.

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    More about this item

    Keywords

    auction; endogenous participation;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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