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

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Bernhardt, Dan, Liu, Tingjun and Sogo, Takeharu (2020) Costly auction entry, royalty payments, and the optimality of asymmetric designs. Journal of Economic Theory, 188 . 105041. doi:10.1016/j.jet.2020.105041

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Official URL: https://doi.org/10.1016/j.jet.2020.105041

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HF Commerce
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Auctions, Auctions -- Economic aspects
Journal or Publication Title: Journal of Economic Theory
Publisher: Elsevier
ISSN: 0022-0531
Official Date: July 2020
Dates:
DateEvent
July 2020Published
3 April 2020Available
28 March 2020Accepted
Volume: 188
Article Number: 105041
DOI: 10.1016/j.jet.2020.105041
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
17502717Hong Kong General Research FundUNSPECIFIED
JP19K13659[JSPS] Japan Society for the Promotion of Sciencehttp://dx.doi.org/10.13039/501100001691
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