Reserve Prices in Common-Value Auctions with Asymmetrically Informed Bidders

Abstract

In this paper, I study common-value auctions with two asymmetrically informed bidders and a reserve price. First, I consider a static auction in which one bidder has perfect information about the value of the object and the other does not have any private information. I derive the optimal reserve price and find that the optimal reserve price is always lower in a static common-value auction with asymmetrically informed bidders than in a standard independent-private-value (SIPV) auction. I then consider a dynamic auction in which an informed bidder obtains private information in two consecutive periods. I characterize a set of equilibria in which the strategy of the informed bidder is to decide whether to bid or to wait until the second period, while the uninformed bidder randomizes his bid, if he bids in the first period, and never bids in the second period. I show that, as long as the uninformed bidder does not have a mass point at the reserve price, the optimal reserve price can be characterized so that it is analogous to the optimal reserve price for the static auction. In addition, I compare the dynamic auction with the first period auction (the seller commits to sell the object in only the first period) and provide conditions under which one auction outperforms the other.