The Reserve That Reshapes Bids
Two risk-neutral bidders have independent private values uniform on [0, 1] in a sealed-bid first-price auction with a public reserve price of 1/2: bids below 1/2 are not accepted, and if nobody bids the object stays unsold. In the symmetric equilibrium, bidders with value below 1/2 stay out and everyone else bids according to a strictly increasing function. What does a bidder with value 1 bid? Give a reduced fraction.
Related problems & prerequisites
Worth solving first
- Values That Lean High 4.0/10
Source: Standard first-price auction with a reserve price (see Riley and Samuelson, 1981). Statement written for AxiomIQ.