Entry Deterrence in Dynamic Auctions
Tilman Klumpp*, XiaoGang Che
Last modified: 2013-04-15
Abstract
We examine a dynamic second-price auction with sequential and costly entry. We show that several types of equilibria exist, which differ in their allocations and prices. In one class of equilibrium, placing a low early bid can have a signaling effect that deters entry by subsequent bidders in the auction. As a result, fewer bidders enter on expectation, and the bidders who do enter obtain a higher expected payoff in equilibrium, compared to the benchmark equilibrium where all bidders submit their true values. A special case of this equilibrium is one with incremental bidding. In this equilibrium, after having submitted low opening bids, buyers raise their bids by a small incremental amount each period.