On reservation prices in the all‐pay contest with correlated information

Abstract

AbstractThis paper investigates the effects of reservation prices in all‐pay auctions based on the Bayesian Nash equilibrium of symmetric distributions with binary and correlated types. Our study finds that reservation prices affect players' behavior in two ways. Given the reservation price, some give up the original strategy of offering a bid lower than such minimum requirement. Therefore, the reservation prices may discourage the effort supply of weaker players. However, stronger innovators do not modify their strategies: They will start giving bids above the reservation price. Hence, setting a quality standard is effective in boosting effort supply. Our study contributes to the function of this particular pattern in the contests, thereby gaining more insight into designing and assessing such competition under different circumstances.