Second-price auctions with private entry costs (Q6105130)

In this article, the authors study asymmetric second-price auctions under incomplete information. On the assumption that the bidders have two potentially different, commonly known, valuations for the object and private information about their entry costs, and the seller, however, does not benefit from these entry costs, the authors calculate the equilibrium strategies of the bidders and analyze the optimal design for the seller in this environment in terms of expected entry and the number of potential bidders. In the special case where bidders are symmetric, that is, they all have the same value for the object, the authors find that the seller would like to reduce the number of bidders that choose to enter from the equilibrium. While reducing the number that enter, the seller collects more from those that decided to enter. In the case where bidders are asymmetric, that is, they have different values for the object, it is shown that, independent of the distribution of the bidders' entry costs and the bidders' valuations for the object, the seller always wishes to reduce participation of at least one type of bidders. The general idea is demonstrated in Section 2. The authors calculate the equilibrium strategies and examine the bidders' behavior in Section 3. The general analysis of the optimal design is carried out in Section 4. The effects of the number of bidders on these auctions are analyzed in Section 5.