When Should Sellers Use Auctions?

When it is costly to participate in the sale of an asset, potential buyers typically submit offers either simultaneously, as in an auction, or sequentially, so that later potential entrants may observe previous bids. We show in an IPV setting that when the entry process is selective, so that buyers with higher values are more likely to enter, both sellers and buyers generally prefer the sequential process and that the difference in seller revenues can be large. We illustrate our findings with parameters estimated from simultaneous entry, open outcry USFS timber auctions. We predict that using the sequential mechanism would raise the USFS’s revenues by 5% in a representative auction, which is many times larger than the gain to setting an optimal reserve price.