Auction design by an informed seller: A foundation of reserve price signalling

Abstract

AbstractThis paper studies mechanism design by a seller privately informed of the (continuous) quality of an indivisible object. An important solution to this informed‐principal problem, the Rothschild–Stiglitz–Wilson mechanisms, which correspond to the least‐cost separating allocations in the signalling literature, is characterized. The characterization reveals that reserve prices are the least costly device to separate sellers of different qualities: In the RSW mechanisms, the lowest‐quality seller adopts her public‐information optimal selling procedure, and each higher‐quality seller adopts a selling procedure that differs from her public‐information optimal one only in that the reserve prices are higher. This finding provides a mechanism‐design foundation for reserve‐price signalling studied in the literature.