Competitive bidding with a bid floor

Abstract

We study competitive bidding with an explicit bid floor, motivated by minimum wage legislation and minimum labor standards. We derive the equilibrium strategies in, and compare the expected procurement costs among, the first-price, second-price, English, and Dutch auctions in a private-cost model. For the English auction, we also consider a variant in which each seller can terminate the auction by jumping down to sell at the price floor. We find that the first-price auction and the aforementioned jump-down English auction lead to a lower expected procurement cost than under the second-price auction and the standard English auction.