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Bid Costs and Endogenous Bid Caps

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Author Info
Gavious, Arieh () (Ben Gurion University, Faculty of Engineering Sciences, School of Industrial Engineering and Management)
Moldovanu, Benny () (Department of Economics, University of Mannheim, Germany)
Sela, Aner () (Ben Gurion University)

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Abstract

We study contests where several privately informed agents bid for a price. All bidders bear a cost of bidding that is an increasing function of their bids, and, moreover, bids may be capped. We show that, regardless of the number of bidders, if agents have linear or concave cost functions then setting a bid cap is not profitable for a designer who wishes to maximize the average bid. On the other hand, if agents have convex cost functions (i.e. an increasing marginal cost) then affectively capping the bids is profitable for a designer facing a sufficiently large number of bidders.

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Publisher Info
Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 01-19.

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Length: 23 pages
Date of creation: 27 Sep 2000
Date of revision:
Handle: RePEc:xrs:sfbmaa:01-19

Note: Roman Inderest and Larry Samuelson made several helpful comments.
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  1. Cohen, Daniel & Sela, Aner, 2005. "Contests with Ties," CEPR Discussion Papers 5132, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Alexander Matros, 2006. "Elimination Tournaments where Players Have Fixed Resources," Working Papers 205, University of Pittsburgh, Department of Economics, revised Jan 2006. [Downloadable!]
  3. Aner Sela, 2002. "Contest Architecture (jointly with Benny Moldovanu)," Theory workshop papers 357966000000000088, UCLA Department of Economics. [Downloadable!]
  4. Cohen, Chen & Sela, Aner, 2005. "Allocation of Prizes in Asymmetric All-Pay Auctions," CEPR Discussion Papers 4951, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Feess,Eberhard & Muehlheusser,Gerd & Walzl,Markus, 2004. "Unfair Contests," Research Memoranda 050, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  6. René Kirkegaard, 2007. "Comparative Statics and Welfare in Heterogeneous Contests: Bribes, Caps, and Performance Thresholds," Working Papers 0702, Brock University, Department of Economics. [Downloadable!]
  7. Todd R. Kaplan & David Wettstein, 2006. "Caps on Political Lobbying: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1351-1354, September.
  8. Konrad, Kai A & Kovenock, Dan, 2005. "Equilibrium and Efficiency in the Tug-of-War," CEPR Discussion Papers 5205, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Amegashie, J., 2007. "American Idol: Should it be a Singing Contest or a Popularity Contest?," Working Papers 2007-8, University of Guelph, Department of Economics. [Downloadable!]
  10. Amegashie, J.A. & Cadsby, C.B. & Song, Y., 2005. "Competitive Burnout: Theory and Experimental Evidence," Working Papers 2005-7, University of Guelph, Department of Economics. [Downloadable!]
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  11. Alexey Malakhov & Rakesh V. Vohra, 2005. "Optimal Auctions for Asymmetrically Budget Constrained Bidders," Discussion Papers 1419, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  12. Guiseppe Dari-Mattiacci & Sander Onderstal & Francesco Parisi, 2006. "Seeking Rents in the Shadow of Coase," Tinbergen Institute Discussion Papers 06-069/1, Tinbergen Institute. [Downloadable!]
  13. Onderstal, S., 2002. "Socially optimal mechanisms," Discussion Paper 34, Tilburg University, Center for Economic Research. [Downloadable!]
  14. Roy Chowdhury, Prabal, 2006. "Controlling Collusion in Auctions: The Role of Ceilings and Reserve Prices," MPRA Paper 1503, University Library of Munich, Germany. [Downloadable!]
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  15. Nicolas Sahuguet, 2006. "Caps in asymmetric all-pay auctions with incomplete information," Economics Bulletin, Economics Bulletin, vol. 3(9), pages 1-8. [Downloadable!]
  16. Matejka, M. & Onderstal, S. & De Waegenaere, A., 2002. "The effectiveness of caps on political lobbying," Discussion Paper 44, Tilburg University, Center for Economic Research. [Downloadable!]
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