Reserve Price Auctions with a Strong Bidder

This paper investigates private-value `reserve price' auctions when there is a strong bidder in an n-bidder model. Consider an auction model, in which bidders draw their values from the same distribution, but then identity of the high-value bidder is revealed. This can be more plausible than the pure symmetry and asymmetry assumptions in certain real-life applications. In many auctions, auctioneers usually set a reserve price. Landsberger, et al. (1999) develop a model with a strong and a weak bidder. We enhance this model by introducing more bidders and reserve prices in both the first-price and the second-price auction. In their paper, Landsberger, et al. only consider the first-price auction without the seller's reserve price (reserve price) for two bidders. Elbittar and Unver (2001) examine this environment with reserve price when there are only 2 bidders.\t The contribution of this paper is generalization of the Elbittar and Unver (2001) work to n-bidders. For the first-price auction, the analytically intractable equilibrium is approximated using computational techniques. Simulation results provide evidence that the first-price auction can still generate as much expected revenue as the second-price auction and even more with an optimal reserve price. The findings can successfully explain the reason of differences in revenues generated at several privatization auctions using the two formats with similar preference structures.