Why a Simple Second-Price Auction Induces Efficient Endogenous Entry

Theory and Decision 66 (2):181-198 (2009)

Abstract
This article further studies ex ante efficient auctions in the setting of Stegeman (1996 Participation costs and efficient auctions, Journal of Economic Theory 71, 228–259.), where there exist entry costs for bidders who know their valuations. An alternative method is established to address efficient auctions. This method illustrates the intuition why the ex ante efficient allocation is Bayesian implementable through the Stegeman (1996) auction (a second-price auction with a reserve price equal to seller’s valuation and no entry fee). More importantly, our method leads to an alternative ex ante efficient auction that implements uniquely the efficient entry. Thus, this alternative auction solves the entry indeterminacy problem of the Stegeman (1996) auction, which generally induces inefficient entry equilibria besides the efficient ones
Keywords Efficient Auction  Endogenous Entry  Entry Costs
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DOI 10.1007/s11238-007-9092-9
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