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Endogenous entry in auctions with negative externalities

Endogenous entry in auctions with negative externalities In this paper, we study the auction to allocate an indivisible good when each potential buyer has a private and independent valuation for the item and suffers a negative externality if a competitor acquires it. In that case, the outside option of each buyer is mechanism-dependent, which implies that participation is endogenous. As several works in the literature have shown, the optimal auction entails strong threats to induce full entry and maximal expected revenue. This results from the full commitment assumption, which ensures that threats are credible. We show that absent credible threats, the entry process does not lead to full participation: the equilibrium entails screening of agents in the entry stage and a trade-off between reserve prices and entry fees. Besides, we discuss the conditions under which the impossibility to use threats does not prevent the seller from ensuring a minimal screening and reaching a high expected revenue. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Theory and Decision Springer Journals

Endogenous entry in auctions with negative externalities

Theory and Decision , Volume 54 (2) – Oct 11, 2004

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References (18)

Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Game Theory, Economics, Social and Behav. Sciences; Operation Research/Decision Theory; Behavioral/Experimental Economics; Statistics for Business/Economics/Mathematical Finance/Insurance
ISSN
0040-5833
eISSN
1573-7187
DOI
10.1023/A:1026212810214
Publisher site
See Article on Publisher Site

Abstract

In this paper, we study the auction to allocate an indivisible good when each potential buyer has a private and independent valuation for the item and suffers a negative externality if a competitor acquires it. In that case, the outside option of each buyer is mechanism-dependent, which implies that participation is endogenous. As several works in the literature have shown, the optimal auction entails strong threats to induce full entry and maximal expected revenue. This results from the full commitment assumption, which ensures that threats are credible. We show that absent credible threats, the entry process does not lead to full participation: the equilibrium entails screening of agents in the entry stage and a trade-off between reserve prices and entry fees. Besides, we discuss the conditions under which the impossibility to use threats does not prevent the seller from ensuring a minimal screening and reaching a high expected revenue.

Journal

Theory and DecisionSpringer Journals

Published: Oct 11, 2004

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