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Bid Costs and Endogenous Bid Caps

Author

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  • 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)

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.

Suggested Citation

  • Gavious, Arieh & Moldovanu, Benny & Sela, Aner, 2000. "Bid Costs and Endogenous Bid Caps," Sonderforschungsbereich 504 Publications 01-19, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:01-19
    Note: Roman Inderest and Larry Samuelson made several helpful comments.
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