Pre-auction strategic communication

TL;DR

This paper models pre-auction communication where bidders send private messages to the seller, showing that the seller's optimal strategy involves a threshold rule for running a second-price auction with a reserve, and commitment improves outcomes.

Contribution

It introduces a two-period model of strategic communication in auctions, demonstrating that the seller's optimal mechanism involves a simple threshold rule and highlighting the value of commitment.

Findings

Seller cannot run discriminatory auctions in equilibrium.

Equilibrium involves a threshold where the seller runs a second-price auction with a reserve.

Seller benefits from committing to a single reserve price.

Abstract

High-stakes auctions are often preceded by nonbinding communication between bidders and the seller. Motivated by these practices, this paper examines a two-period model in which two bidders send private cheap talk messages to the seller about their valuations, and the seller decides in the second period whether to run a mechanism or take an outside option that disappears if she chooses to run the auction. The seller has commitment within any mechanism she chooses to run, but no commitment over how she uses any information communicated. Despite having potentially asymmetric posteriors after the communication stage, the seller cannot run discriminatory auctions in equilibrium. Under some natural restrictions, any bidder-symmetric perfect Bayesian equilibrium of this model is a threshold equilibrium where the seller runs a second-price auction with a single reserve if and only if both bidders are above the threshold. The seller is better off being able to commit to the restricted class of mechanisms where she must choose a single reserve price.