Non-existence of monotone equilibria in games with correlated signals

Abstract

Participation in economic games such as auctions is typically costly, which means that players (potential bidders) must consider whether to participate. Such decisions may be no less crucial than how to bid, and yet the literature has been mostly concerned with bidding, assuming an exogenously given number of bidders; see Krishna [Auction Theory, Academic Press, New York, 2002]. Landsberger and Tsirelson [Correlated signals against monotone equilibria, preprint SSRN 222308, Social Science Research Network Electronic Library, May 2000. Available online: http://papers.ssrn.com/abstract=222308 ] have shown that fundamental results established in symmetric auction theory with correlated signals, such as the existence of a monotone equilibrium, may not hold if participation decisions are part of equilibrium. The major goal of this paper is to illustrate and explain this result that may be considered counter intuitive given the emphasis placed on monotone equilibria in the auction literature.