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Costly auction entry, royalty payments, and the optimality of asymmetric designs

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  • Bernhardt, Dan
  • Liu, Tingjun
  • Sogo, Takeharu

Abstract

We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more.

Suggested Citation

  • Bernhardt, Dan & Liu, Tingjun & Sogo, Takeharu, 2020. "Costly auction entry, royalty payments, and the optimality of asymmetric designs," Journal of Economic Theory, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:jetheo:v:188:y:2020:i:c:s0022053118305118
    DOI: 10.1016/j.jet.2020.105041
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    Cited by:

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    3. Wang, Dazhong & Xu, Xinyi & Zeng, Xianjie, 2022. "Bid signaling in first-price royalty auction," Economics Letters, Elsevier, vol. 216(C).
    4. Jyh-Bang Jou & Charlene Tan Lee, 2023. "Design of the contingent royalty rate as related to the type of investment," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-25, December.

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    More about this item

    Keywords

    Auctions with participation costs; Royalty payments; Optimal auctions; Asymmetric auctions; Heterogeneous bidders;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G3 - Financial Economics - - Corporate Finance and Governance

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