Equilibrium in Auctions with Entry By DAN LEVIN AND JAMES L. SMITH*                    Presenter 楊極致

Contents • Introduction • The Entry Process -Assumptions -Basical ideas -Characterize optimal entry fee in 3 auction environments • Market Thickness and Coordination Costs • Concluding Remarks

Introduction • Previous research A presumption in most action theory Exogenouly determined “fixed-n”paradigm problem: ignoring bidders' entry incentives • This paper's purpose Model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic

• Approach 1 Introducing mixed entry strategies each bidder enter with probability q stay out with 1-q previous research: entrants using pure strategies in which exactly n bidders enter and N-n stay out. 2 Our model creats an equilibrium in which the number of actual bidders is stochastic and range from 0 to N

• 3 Market thickness's impact coordination cost associated with thick markets create incentives that may induce sellers to limit entry previous research: extra bidders have no real impact • 4 Variations in the auction environment affect mechanism design reservation prices are not desired in IPV auctions while being useful in CV auctions

ⅠThe Entry Process •

first stage N incur c

second stage n m(R,e)

in the first state, N potential bidders decide whether or not incur c(entry cost) , in the second stage the item is allocate among n actual bidders according to seller's mechanism m

• Assumptions

• Individual's ex ante expected gain E[πln,m] A unique n* exists in which E[πln*,m]≥0>E[πln*+1,m] A symmetric entry equilibrium must yield the same probability of entry for all potential bidders. For q* ∈ (0, 1) to constitute a mixed-strategy equilibrium, each potential entrant must be indifferent between entering or not

The number of actual bidders follows a binomial distribution with mean q*N = n and vari- ance (1 - q*)n determined by m, N, and c.

• Seller's mechanism m(R,e) R = {R1,.. ., RN}, where Ri repre- sents the common-knowledge reserve price enforced by the seller if n bidders enter. Entry fee e is paid before bidders obtain estimates, it does not screen bidders with low valuation T represent the event that trade occurs and Tn(Rn) represent the probability of trade given n and the seller's mechanism. • One bidder's ex ante expected profit (Vn - Wn)/n - (c + e)

• ith bidder's expected profit We use Ω to denote {m(R,e),c,N} and Bi(q,Ω) to denote the ith bidder's expected profit from entering when all N- 1 rivals are using arbitrary entry probability q

• the expected profit of all N parties

• seller's expected revenue

• Total social welfare is the sum of all ex- pected gains

• the best response for the ith bidder is to enter (qi = 1) if B(q, Ω) > 0 or to stay out (qi = 0) if Bi(q, Ω) <0. The bidder is content to use q* if and only if

• LEMMA1

Characterize optimal entry fee

ρ:correlation between the expected profit of an entrant and the number of rivals he faces. • There is almost no scope for ρ≥0 Thus

• By the induced entry equilibrium, Bi(q*, Ω)=0,thus seller's expected revenue constitutes total social welfare:

• PROPOSITION 1: Any mechanism that maximizes the seller's expected revenue also induces socially optimal entry. Such a mechanism might involve entry fees, but not reservation prices. • PROPOSITION 2: Any two mechanisms that are revenue-equivalent with fixed n and R remain revenue-equivalent with induced entry.

Characterize optimal entry fee • Question: optimal entry fee maximizes social welfare. But whether the seller would encourage (subsidize) or discourage (tax) entry remains unclear. • The answer to this question requires more specific information regarding the auction environment, as we demonstrate next 3 auction environments. • ①Common values ② Independent private values ③Affiliated private values

Common values • V is independent of the number of bidder seller's optimal reservation price is zero, so Tn(Rs) = 1 for all n • social welfare • with ∂S/∂q = N[(1 -q )N-lV - c], and ∂S2 /∂q2 < 0. Thus, e* must induce entry such that at q*, dS/dq vanishes:

• PROPOSITION 3: In CV auctions the seller should discourage entry by charging a positive entry fee but no reservation price. Without the entry fee, entry would be excessive from social and private points of view. • another inter pretation of Proposition3: reducing q also raises the probability of no entrants • Another question: If the seller cannot charge entry fees,would he then want to use distortive reservation prices to discourage entry instead?

• PROPOSITION 4: If entry fees are not allowed, the seller gains by introducing at least R1 > 0 in CV auctions. While the use of reservation prices against single bidders may appear obvious, it is not universal • PROPOSITION 5: The revenue ranking of any two CV auction mechanisms that do not entail reservation prices or entry fees is preserved with equilibrium entry.

Independent private values • the seller does not want to discourage entry • Rs = 0 implies Tn(Rn) = 1 for all n

• PROPOSITION 6: Optimal entry, for society and the seller, occurs in IPV auctions when the seller charges no entry fee or reservation price.

-0- =V0 We claim that (19) vanishes since V0 = 0

• COROLLARY: In IPV auctions with entry, the seller should not resort to reservation prices, even if he cannot charge entry fees.

• Intuition: When one bidder joins an IPV auction when n - 1 are present, the social gain is simply (Vn- Vn-1 - c), whereas the individual bidder's gain is (Vn-Wn)/n - c. Due to (18), the two always coincide. No matter how many rivals are expected, in IPV auctions the private gain from further entry corresponds exactly to that of society . Since the seller has no reason in IPV auctions to discourage entry , the reservation price loses its only appeal.

Affiliated private values • PROPOSITION 7: If private values are affiliated (conditionally independently and identically distributed), then free entry with no reservation price is optimal for society and the seller under a secondprice mechanism, but excessive under a first-price mechanism.

e=0 free entry

CV

IPV

APV

first-price mechanism

q is excessive

q is optimal

q is excessive

second-price mechanism

q is excessive

q is optimal

q is optimal

ⅡMarket Thickness and Coordination Costs • Question : we have studied entry probability q, but what is the optimal number N of potential bidders? Is more necessarily better? Whether the weight of unfavorable outcomes varies systematically with N? • The expected number of bidders induced by a given mechanism varies ambiguously with N .

• PROPOSITION 8: As the number of potential bidders increases beyond n* in CV auctions, the probability of no entry also increases if the seller is using an optimal mechanism.

• PROPOSITION 9: The level of social wel- fare generated by optimal auctions decreases monotonically as N increases beyond n*.

• COROLLARY: The expected revenue of any seller who uses his optimal mechanism increases monotonically as the number of potential bidders decreases toward n*. • Defineθ= N/n*. The thicker the market, the larger is the number of redundant bidders, and the greater are the penalties that society and the seller pay for permitting randomized entry. • Demand and supply factors influence market thickness separately example holding the number of potential bidders (demand side) constant, any change in the nature of the item (supply side) that increases the relative magnitude of c will reduce n* and thereby raise θ

Ⅲ Concluding Remarks • We have introduced a model of induced entry that differs from previous work in several important ways. • First, we maintain symmetry throughout, which limits potential entrants to mixed entry strategies. • Second, our treatment of induced entry generates new and unexpected insights. Reservation prices are seen strictly as instruments that discourage entry, which may or may not be beneficial depending on the environment • Third, the mere existence of more potential bidders can impose costs on society and the seller, whether they are actually bidding or not

• Thank you for your listening

Equilibrium in Auctions with Entry

By the induced entry equilibrium, Bi(q*, Ω)=0,thus seller's expected revenue constitutes total social welfare: • PROPOSITION 1: Any mechanism that maximizes the seller's expected revenue also induces socially optimal entry. Such a mechanism might involve entry fees, but not reservation prices. • PROPOSITION 2: Any ...

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