Economic Theory

, Volume 38, Issue 1, pp 73–103

Auction design with opportunity cost

Symposium

Abstract

This paper studies revenue-maximizing auctions in an independent private value setting where potential bidders have known positive opportunity cost of bidding. The main findings are as follows. Firstly, there is no loss of generality in deriving the revenue-maximizing auctions within the class of threshold-entry mechanisms. Secondly, for any given set of entry thresholds, a second-price sealed-bid auction with properly set reserve prices and entry subsidy is revenue-maximizing. Thirdly, a variety of auctions are revenue-maximizing within the symmetric threshold-entry class. Two of them involve no entry subsidy (fee). Fourthly, we identify sufficient conditions under which it is in the seller’s interest to limit the number of potential bidders even if the revenue-maximizing symmetric threshold-entry auction is adopted. Lastly, the revenue-maximizing auction implements asymmetric entry across symmetric bidders in many cases.

Keywords

Auction design Endogenous entry Opportunity cost 

JEL Classification

D44 D82 

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Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.Department of EconomicsNational University of SingaporeSingaporeSingapore

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