Second-price auctions with sequential and costly participation

Abstract

This paper studies second-price auctions in which bidders make participation decisions sequentially in an exogenous order and participating bidders incur bidding costs. When bidders decide whether to participate or not, they know their own valuations as well as earlier bidders’ participation decisions. To analyze bidders’ participation and bidding decisions, we study equilibria in cutoff strategies with which a bidder participates and bids his valuation if his valuation exceeds a cutoff given his observation on earlier bidders’ participation. Focusing on the case of two bidders, we present two main results on comparative statics and revenue comparison. In the comparative statics analysis, we study the effects of a change in bidders’ characteristics on equilibrium cutoffs. In revenue comparison, we show that the considered sequential entry format yields lower revenue than the simultaneous entry counterpart. Finally, we discuss the difficulties in generalizing these two results for the case of more than two bidders.