Abstract
We study a symmetric private value auction with signaling, in which the auction outcome is used by an outside observer to infer the bidders' types. We elicit conditions under which an essentially unique D1 equilibrium bidding function exists in four auction formats: first-price, second-price, all-pay and the English auction. We obtain a strict ranking in terms of expected revenues: the first-price and all-pay auctions dominate the English auction but are dominated by the second-price auction.
Highlights
Signaling constitutes an important motivation and determinant for many forms of publicly observable behavior of individuals and organizations
As for the second‐price auction, the winner's payment only imposes a lower bound on the receiver's expected beliefs about the winner's type, and this again induces the low valuation types to bid significantly above their valuation because the receiver's expected inference about the winner is just above the ex ante average valuation (V ) and the expected inference about the losers is close to the lowest possible valuation
We have studied the second‐price and the English “button” auctions with signaling, assuming that all bidders care about an outside observer's beliefs about their type, if the outside observer sees the identity and payment of the auction's winner
Summary
Signaling constitutes an important motivation and determinant for many forms of publicly observable behavior of individuals and organizations. If the English auction has no winner at price b, all active bidders can take it as a given that the second‐highest bid is at least b, and that the receiver's expected inference about the winner will be bounded from below by β−1 (b).
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