Bid signaling in first-price royalty auction

Abstract

It is common that seller’s post-auction input affects winner’s valuation in the widely used royalty auctions. This study considers bidders’ signaling incentives and seller’s choice of reserve price in the first-price royalty auction. We first characterize the unique symmetric D1 PBE in which the quasi-separating bidding strategy can be decomposed into the equilibrium bid without signaling incentive and the signaling premium. The signaling premium increases in bidder’s type, indicating that a higher type has more incentive to raise bid to induce more effort from the seller. The optimal reserve price is lower than that under the post-auction complete information scenario, which leads to a more efficient allocation and a higher payoff for the seller. The optimal reserve price is non-monotonic in royalty rate while the seller’s equilibrium payoff increases in it, and full surplus extraction is obtained when the royalty rate approaches 100%.