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.
Creation-Date: July 1993
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