Theory and Decision

, Volume 66, Issue 2, pp 181–198 | Cite as

Why a Simple Second-Price Auction Induces Efficient Endogenous Entry

Article

Abstract

This article further studies ex ante efficient auctions in the setting of Stegeman (1996 Participation costs and efficient auctions, Journal of Economic Theory 71, 228–259.), where there exist entry costs for bidders who know their valuations. An alternative method is established to address efficient auctions. This method illustrates the intuition why the ex ante efficient allocation is Bayesian implementable through the Stegeman (1996) auction (a second-price auction with a reserve price equal to seller’s valuation and no entry fee). More importantly, our method leads to an alternative ex ante efficient auction that implements uniquely the efficient entry. Thus, this alternative auction solves the entry indeterminacy problem of the Stegeman (1996) auction, which generally induces inefficient entry equilibria besides the efficient ones.

Keywords

Efficient Auction Endogenous Entry Entry Costs 

JEL Classifications

D44 D82 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Bergemann D., Välimäki, J. (2000), Information acquisition and efficient mechanism design. econometrica 70, 1007–1033CrossRefGoogle Scholar
  2. Bergemann, D. and Välimäki, J. (2005), Information in Mechanism Design, Cowles Foundation Discussion Paper No. 1532.Google Scholar
  3. Engelbrecht-Wiggans R. (1987), On optimal reserve prices in auctions. Management Science 33, 763–770CrossRefGoogle Scholar
  4. Engelbrecht-Wiggans R. (1993), Optimal auction revisited. Games and Economic Behavior, 5, 227–239CrossRefGoogle Scholar
  5. French K., McCormick R. (1984), Sealed bids, sunk costs, and the process of competition. Journal of Business 57, 417–441CrossRefGoogle Scholar
  6. Green J., Laffont J.J. (1984), Participation constraints in the Vickrey auction. Economics Letters 16, 31–36CrossRefGoogle Scholar
  7. Harstad R. (1990), Alternative common-value auction procedures: Revenue comparisons with free entry. Journal of Political Economy 98, 421–429CrossRefGoogle Scholar
  8. Levin D., Smith J.L. (1994), Equilibrium in auctions with entry. The American Economic Review 84, 585–599Google Scholar
  9. Lu, J. (2005), Efficient Auction with Private-Information Participation Cost, National University of Singapore, Working Paper.Google Scholar
  10. Lu, J. (2006), Auction Design with Opportunity Cost, National University of Singapore, Working paper.Google Scholar
  11. Matthews, S. (1984), Information acquisition in discriminatory auctions, in Boyer, M. and Kihlstrom, R. (eds.), Bayesian Models in Economic Theory, Elsevier Science Publishers B. V.Google Scholar
  12. McAfee R.P., McMillan J. (1987), Auctions with entry. Economics Letters 23, 343–347CrossRefGoogle Scholar
  13. Menezes F.M., Monteiro P.K. (2000), Auction with endogenous participation. Review of Economic Design 5, 71–89CrossRefGoogle Scholar
  14. Milgrom P. (1981), Rational expectations, information acquisition, and competitive bidding. Econometrica 49, 921–943CrossRefGoogle Scholar
  15. Persico N. (2000), Information acquisition in auctions. Econometrica 68, 135–148CrossRefGoogle Scholar
  16. Rezende, L. (2005), Mid-Auction Information Acquisition, Discussion Paper, University of Illinois.Google Scholar
  17. Samuelson W.F. (1985), Competitive bidding with entry costs. Economics Letters 17, 53–57CrossRefGoogle Scholar
  18. Stegeman M. (1996), Participation costs and efficient auctions. Journal of Economic Theory 71, 228–259CrossRefGoogle Scholar
  19. Tan G. (1992), Entry and R&D in procurement contracting. Journal of Economic Theory 58, 41–60CrossRefGoogle Scholar
  20. Tan G., Yilankaya O. (2006), Equilibria in second price auctions with participation costs. Journal of Economic Theory 130, 205–219CrossRefGoogle Scholar
  21. Ye, L. (2004), Optimal auctions with endogenous entry, Contributions to Theoretical Economics 4, article 8.Google Scholar

Copyright information

© Springer Science+Business Media, LLC. 2007

Authors and Affiliations

  1. 1.Department of EconomicsNational University of SingaporeSingaporeSingapore

Personalised recommendations