Entry and selection in auctions

"We develop and estimate an entry model for second price and open outcry independent private value auctions where potential bidders receive an imperfectly informative signal about their value prior to deciding whether to pay a sunk entry cost. In this way the model flexibly allows for selection on values, which will affect an entrant's subsequent competitiveness, at the entry stage. As signals become more informative, the entry process exhibits greater selection as firms with higher values are more likely to enter. We allow for asymmetries across bidders and unobserved heterogeneity across auctions, which are important features of most data sets. We show how incorrectly assuming the extremes of either no selection (no signal) or perfect selection (prior knowledge of one's value) - the common alternatives in the literature - can yield incorrect estimates of model primitives and bias the results from counterfactuals. We apply our model to U.S. Forest Service timber auctions and find strong evidence in favor of a selective entry process. We take advantage of the flexible entry model to reevaluate the well known theory result that with fixed participation a seller prefers an extra bidder over the ability to set an optimal reserve price. In our model, the relative value of setting a reserve price and increasing the number of potential entrants to a revenue-maximizing seller will depend on the degree of selection. Our structural estimates imply that, if the USFS wants to maximize revenues, it will benefit more from adding an additional potential entrant than setting an optimal reserve price"--National Bureau of Economic Research web site.