Prebidding vs. Postbidding in First-Price Auctions with and Without Head-Starts

Abstract

We study the effect of prebidding and postbidding in first-price auctions with a single prize under incomplete information. All the bidders' values are private information except bidder 1's value which is commonly known. Bidder 1 places his bid either before (prebidding auction) or after (postbidding auction) all the other bidders. We show that for relatively small (high) values of bidder 1 the prebidding auction yields a lower (higher) expected highest bid than the postbidding auction. However, by giving head-starts, for relatively small (high) values of bidder 1, the prebidding auction yields a higher (lower) expected bid than the postbidding auction. In other words, head-starts may completely change the comparative benefit of the seller in prebidding and postbidding first-price auctions.