SFB 303 Discussion Paper No. B-251
Author:
Harstad, Ronald M.
Title: Auctions With Endogenous Bidder Participation
Abstract: Milgrom and
Weber's General Symmetric Model of auctions is adapted to
an extensive form in which seller first announces rules for an auction, then
each of a pool of potential bidders makes a rational choice whether to
participate, i.e., to acquire some initial information at an opportunity
cost. This fundamentally changes the way choices among auction rules are
analyzed; some previously central questions lose much of their relevance.
If an otherwise revenue-enhancing mechanism discourages entry, then its net
impact may be to reduce revenue. In this model, on average, revenue equals
asset value to the winner less aggregate participation costs, for any
standard auction mechanism. Seller chooses an allocatively efficient auction
mechanism. A nontrival reserve price is a revenue-inferior policy; other
surplus-extracting devices have switched from complements to substitutes.
Underlying parameters divide into two regions: one "overattractive", the
other "underattractive". All expected revenue comparisons for a fixed number
of bidders carry over to the overattractive region, and all are reversed for
the underattractive region. Overattractiveness characterizes any auction
with sufficiently low participation costs, or sufficiently imprecise
information. The paper considers extensions to multiple levels of
participation costs, and to risk aversion.
Keywords:
JEL-Classification-Number:
Creation-Date: July 1993
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