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Equilibria in Asymmetric Auctions with Entry

By Jun Nakabayashi

Abstract

Regarding optimal design in the private value environment, there is an unsolved discrepancy in the literature regarding asymmetric auctions and auctions with endogenous participation; Literature on the former suggests that well-designed distortive mechanisms are optimal (revenue maximizing) assuming the bidding costs are negligible, while that on the latter insists that the mechanisms with free entry and no distortion are optimal provided that the potential bidders are ex ante symmetric.This paper is the first attempt to reconcile the two views by establishing a model for asymmetric auctions with costly participation. The main findings are threefold; First, an optimal outcome is possible if and only if the mechanism is ex post efficient. Second, without any participation control, a coordination problem is likely in which only the weak bidders participate and the strong bidders stay out. Finally, there is an entry fee/subsidization scheme which, together with an ex post efficient mechanism, induces the optimal outcome as a unique equilibrium.

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