Lottery versus all-pay auction contests: A revenue dominance theorem |
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| Institution: | 1. University of Dortmund (TU), Department of Economics, Vogelpothsweg 87, 44227 Dortmund, Germany;2. University of Würzburg, Institute of Mathematics, Emil-Fischer-Str. 30, 97074 Würzburg, Germany;1. Department of Economics, National University of Singapore, 10 Kent Ridge Crescent, Singapore 119260, Singapore;2. School of Economics, Shandong University, 27 Shanda Nanlu, Jinan 250100, China;1. Department of Economics, Ben-Gurion University of the Negev, Israel;2. Departamento de Economía, Universidad Carlos III de Madrid, Spain;3. Department of Economics, University of Haifa, Israel;1. School of Economics, University of East Anglia, Earlham Road, Norwich NR4 7TJ, UK;2. Centre for Behavioural and Experimental Social Science, University of East Anglia, Earlham Road, Norwich NR4 7TJ, UK;3. Centre for Competition Policy, University of East Anglia, Earlham Road, Norwich NR4 7TJ, UK;1. School of Economics, Centre for Behavioural and Experimental Social Science, and ESRC Centre for Competition Policy, University of East Anglia, Norwich NR4 7TJ, UK;2. Department of Economics, Case Western Reserve University, 11119 Bellflower Road, Cleveland, OH 44106, USA;3. Economic Science Institute, Chapman University, One University Drive, Orange, CA 92866, USA;4. School of Economics, and Centre for Behavioural and Experimental Social Science, University of East Anglia, Norwich NR4 7TJ, UK;1. Tel-Aviv University, Israel;2. Aarhus University, Denmark;3. Chinese University of Hong Kong, Hong Kong |
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| Abstract: | We allow a contest organizer to bias a contest in a discriminatory way; i.e., she can favor specific contestants by designing the contest rule in order to maximize total equilibrium effort (resp. revenue). The two predominant contest regimes are considered, all-pay auctions and lottery contests. For all-pay auctions the optimal bias is derived in closed form: It implies extreme competitive pressure among active contestants and low endogenous participation rates. Moreover, the exclusion principle advanced by Baye et al. (1993) becomes obsolete in this case. In contrast, the optimally biased lottery induces a higher number of actively participating contestants due to softer competition. Our main result regarding total revenue comparison under the optimal biases reveals that the all-pay auction revenue-dominates the lottery contest for all levels of heterogeneity among contestants. The incentive effect due to a strongly discriminating contest rule (all-pay auction) dominates the participation effect due to a weakly discriminating contest rule (lottery). |
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| Keywords: | All-pay auction Lottery contest Optimal bias Revenue Exclusion principle |
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