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Auctions with heterogeneous entry costs

Author

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  • Diego Moreno
  • 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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Suggested Citation

  • Diego Moreno & John Wooders, 2011. "Auctions with heterogeneous entry costs," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 313-336, June.
    • Handle: RePEc:bla:randje:v:42:y:2011:i:2:p:313-336
    DOI: j.1756-2171.2011.00135.x
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