Information Asymmetries in Common-Value Auctions with Discrete Signals

Abstract

We consider common-value hybrid auctions among two asymmetrically informed bidders, where the winning bidder pays his bid with some positive probability k and the losing bid otherwise. Under the assumption of discrete and affiliated signals, we give an explicit characterization of the (unique) equilibrium, based on a simple recurrence relation. We show that equilibrium revenue is decreasing in k, and that the limit second-price equilibrium that is selected entails extensive free-riding by uninformed bidders. We further show that the Linkage Principle can fail to hold even in a pure first-price auction with binary signals: public revelation of a signal to both bidders may decrease the auctioneer's revenue. Lastly, we analyze the effects of public acquisition of additional information on bidder utilities and exhibit cases in which both bidders strictly prefer for a specific bidder to receive additional information.

Keywords: common value, asymmetric information, revenue ranking, failure of linkage principle

JEL Classification: D44, D82, C72