TY - JOUR
T1 - Costly auction entry, royalty payments, and the optimality of asymmetric designs
AU - Bernhardt, Dan
AU - Liu, Tingjun
AU - Sogo, Takeharu
N1 - Funding Information:
We are grateful to the anonymous referees, the associate editor and the editor for their constructive input. We thank Yu Awaya, Vivek Bhattacharya, Stephen Ching, Vijay Krishna, Jingfeng Lu, Hidenori Takahashi, and numerous seminar and conference participants for helpful comments. Liu gratefully acknowledges financial support by the General Research Fund sponsored by the Research Grants Council in Hong Kong (project number 17502717 ). Sogo gratefully acknowledges financial support by JSPS KAKENHI Grant Number JP19K13659 .
Funding Information:
We are grateful to the anonymous referees, the associate editor and the editor for their constructive input. We thank Yu Awaya, Vivek Bhattacharya, Stephen Ching, Vijay Krishna, Jingfeng Lu, Hidenori Takahashi, and numerous seminar and conference participants for helpful comments. Liu gratefully acknowledges financial support by the General Research Fund sponsored by the Research Grants Council in Hong Kong (project number 17502717). Sogo gratefully acknowledges financial support by JSPS KAKENHI Grant Number JP19K13659.
Publisher Copyright:
© 2020
PY - 2020/7
Y1 - 2020/7
N2 - 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.
AB - 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.
KW - Asymmetric auctions
KW - Auctions with participation costs
KW - Heterogeneous bidders
KW - Optimal auctions
KW - Royalty payments
UR - http://www.scopus.com/inward/record.url?scp=85082752319&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85082752319&partnerID=8YFLogxK
U2 - 10.1016/j.jet.2020.105041
DO - 10.1016/j.jet.2020.105041
M3 - Article
AN - SCOPUS:85082752319
SN - 0022-0531
VL - 188
JO - Journal of Economic Theory
JF - Journal of Economic Theory
M1 - 105041
ER -