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Auction Design by an Informed Seller: The Optimality of Reserve Price Signaling

Xin Zhao

No 53, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper studies mechanism design by a seller privately informed of the quality of an indivisible object. The privacy of the seller’s information matters for mechanism design: selecting a mechanism that maximizes the seller’s profit when her information is public is not incentive compatible for the seller when her information is private, as a lower-quality seller has an incentive to mimic a higher-quality seller. I show that reserve prices are the least costly device to separate higher-quality sellers from lower-quality ones. In equilibria that maximize the expected profit of every type of the seller among all separating equilibria, the lowest-quality seller adopts her public-information optimal mechanism, and each higher-quality seller adopts a mechanism that differs from her public-information optimal mechanism only in that the reserve prices are higher.

Keywords: Mechanism design; informed principal; reserve price; signaling (search for similar items in EconPapers)
JEL-codes: D44 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic and nep-reg
Date: 2018-10-06
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