Costly auction entry, royalty payments, and the optimality of asymmetric designs (Q785528)

This paper investigates the optimal design of auctions when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. After a serious and precise analysis of the intrinsic properties of this mechanism, the authors substantiate their research and conclusions in the following areas: with sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities; when bidders are ex-ante identical, higher royalty rates-which tie payments more closely to bidder types-increase the optimal degree of asymmetry in auction design, allowing the seller to raise revenues further; when bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. The authors provide sufficient conditions under which a seller should restrict entry to a single bidder, setting a take-it-or-leave-it price. The reader can find the precise mathematical proofs of the stated statements in the specialized Section Appendix A.