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We study the efficiency of standard auctions with interdependent values in which one of two bidders is perfectly informed of his value while the other is partially informed. The second-price auction, as well as English auction, has a unique ex-post equilibrium that yields efficient allocation. By contrast, the first-price auction has no efficient equilibrium.
Keywords: Interdependent value, Insider, Second-price auction, First-price auction
JEL Classification: C92, D44, D82
(ProQuest: ... denotes formulae omitted.)
I. Introduction
Most auction literature assumes that bidders are ex ante homogeneous in terms of the amount of the information they hold about the auctioned object. More specifically, each bidder is assumed to hold a singledimensional information (or signal) about the value of the object. In reality, however, there are many instances in which bidders hold heterogeneous information in terms of its informativeness of the object value. For instance, in a spectrum auction, an incumbent company that has been doing business for a long time should have an advantage in the estimation of the object value compared with newcomers. In addition, in an auction for selling a tract in the outer continental shelf (socalled OCS auction), a company would have an informational advantage over others if it owns and has drilled a neighboring tract.1 The bidders who have superior information as in the above examples can be considered insiders in the auction.
The current paper studies the efficiency implication of an insider bidder in standard auctions with two bidders, in which one is an insider and the other is an outsider. Following the standard approach, the value interdependence is modeled by assuming that the two bidders' values are determined by two-dimensional signals. The outsider bidder is only informed of one of the two signals, so he is partially informed of his value. The paper departs from the existing literature by assuming that the insider is fully informed of his value. We ask whether the standard auctions - first-price, second-price, and English auctions - have an efficient equilibrium (i.e., an equilibrium in which the object is allocated to whomever has the higher value).2
The two auction formats, first-price and second-price auctions, exhibit a contrasting efficiency performance: the unique undominated Nash equilibrium of the second-price auction yields efficient allocation, whereas the first-price auction does...