Participation in auctions

Abstract

Participation (preparing offers) in auction and procurement games—e.g., bidding for spectrum rights or for control of corporations—is very costly, which calls for analyzing participation (no less than how to play the games) as part of equilibrium. The result is a model with bi-dimensional distribution of types (as in [Jackson, M.O., 1999. Nonexistence of equilibria in auctions with both private and common values. Mimeo. http://www.stanford.edu/~jacksonm/nonexist.pdf]) and endogenous distribution of participants. Players with low production but high participation costs may decide not to participate, forcing the auctioneer to pay higher-than-necessary prices. To mitigate this phenomenon, auctioneers may consider partially reimbursing participants for the costs they incur in preparing offers. Restricting attention to symmetric games, we prove that • The game we consider has a unique symmetric equilibrium, with and without the reimbursement mechanism. • Partially reimbursing bidders for the cost of preparing bids pays off for virtually all joint distributions of types. • A constant reimbursement rule, independent of participation cost, causes losses.