On the optimal entry fee and reserve price for auctions with selective entry: A comment on Gentry, Li, Lu (2017)

Abstract

Gentry, Li, Lu (2017) (GLL henceforth) study an auction model with endogenous entry in which, before the entry decision, each bidder observes a private signal; a higher signal implies a better distribution for the bidder's valuation. GLL claim that the optimal reserve price is greater than the seller's value for the object on sale and that the optimal entry fee is positive. We prove that these claims are incorrect: The seller may want to subsidize entry to stimulate competition in the auction (through a negative entry fee or through a reserve price below the seller's value), or to provide appropriate entry incentives if a suitable reserve price is effective at maximizing total surplus and at extracting bidders' rents.