Equilibrium in auctions with entry

TLDR

The study models entry incentives in auctions with risk‑neutral bidders and characterizes a symmetric equilibrium in which the number of entrants is stochastic. The authors use a model of entry incentives to characterize a symmetric equilibrium where the number of entrants is stochastic. The analysis shows that too many potential bidders raise coordination costs that reduce welfare, that sellers and society can benefit from policies that reduce market thickness, and that variations in the auction environment affect optimal policies such as reservation prices in ways not anticipated by models that ignore entry. Copyright 1994 by American Economic Association.

Abstract

The authors model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. The authors show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Their analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry. Copyright 1994 by American Economic Association.