Auctions with Frictions

The "auction with frictions" model features costly recruiting of bidders, costly bidders' participation and limited seller's commitment ability. The latter failure is probably the main qualitative departure of our analysis from prior work that features costly recruitment or entry costs. It affects both the recruitment and the bidding phases: in the former phase, the seller may be unable to commit to the extent of the recruitment effort; in the latter phase, the seller might not be able to credibly disclose the extent of the actual participation or commit to a positive reserve price.

One set of insights concerns inherent inefficiencies: excessive recruitment effort and inefficient extent of entry. The latter sometimes takes the extreme form of complete shutdown of trade, even when the potential gains are non-negligible. Another set of insights concerns the effect of bidders' ability to observe the extent of participation (or seller's ability to credibly disclose it). It identifies conditions under which observability can be beneficial or detrimental for trade. Yet another set of insights concerns revenue ranking of the first and second price auction formats. In the presence of these frictions, they are not equivalent, and their ranking depends on recruitment and entry-cost conditions.

A later part of the paper examines how seller's private information may affect this interaction. One of the insights here is that the market may unravel almost completely. Almost all seller types may stay out of the market (do not recruit bidders), not realizing potential gains from trade.

 These insights do not arise in the existing literature on auctions with recruitment and entry costs, where the seller can commit to particular participation levels or use entry fees or subsidies to ensure optimal entry.