We model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. We show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Our analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry.

The authors model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. The authors show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Their analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry.

The Bertrand-Edgeworth model describes competition among price setting sellers with production capacity constraints. The authors report on laboratory experiments that permit evaluation of different theories of Bertrand-Edgeworth competition: competitive pricing, Edgeworth cycles in prices, mixed strategy Nash equilibrium pricing, and tacit collusion. Each of the theories helps to explain some aspects of the data. However, none of these theories are completely consistent with the data. In relative terms, the Edgeworth cycle theory provides better predictions of key aspects of the data than the other theories. Coauthors are Stephen Rassenti, Stanley S. Reynolds, and Vernon L. Smith.