Auction

An auction allocates goods using submitted messages and a specified payment rule. Private-value auctions model each bidder's valuation as its own private information. Equilibrium bids depend on the allocation and payment rules, not only on valuations.

A single-item auction in which the highest bidder wins and pays the highest competing bid. Under private values and quasilinear utility, bidding one's valuation is a dominant strategy: if the competing maximum is below one's value, winning at that price is best; if it is above one's value, losing is best; equality gives zero utility either way. Thus truthful bidding is an ex post Nash equilibrium.

The highest bidder wins a single item but pays the lowest submitted bid, while losers pay nothing. This differs from a lowest unique bid auction. With at least two bidders using increasing strategies, the winning bidder pays the smallest opponent bid.

// Target: mathematical-optimization.bigb

For $n\ge 2$ risk-neutral bidders with independent uniform distributions on $[0,1]$, the lowest-price auction has a symmetric Bayesian Nash equilibrium $b(v)=(n-1)v$. A deviation bidding $(n-1)z$, with $0\le z\le 1$, wins with probability $z^{n-1}$ and has expected payment $(n-1)z^n/n$. Its expected profit is $v{z}^{n-1}-(n-1)z^n/n$, whose derivative is $(n-1)z^{n-2}(v-z)$, proving optimality at $z=v$. Bids above $n-1$ give the same outcome as $z=1$. The seller receives $(n-1)$ times the minimum of $n$ independent uniform valuations, with expected revenue $(n-1)/(n+1)$.

// Target: mathematical-optimization.bigb

A reserve price is the seller's minimum acceptable price. In an English auction it changes both the sale rule and the payment rule: the highest valuation must exceed the reserve and the winner pays at least the reserve. Mechanisms with different reserves generally have different allocation probabilities, so revenue equivalence need not equate their expected revenues.

In an ideal continuous-price auction with independent private values, bidders remain active up to their valuations. Without a reserve, the last remaining bidder wins at the second-highest valuation. With a reserve price $r$, there is no sale if every valuation is below $r$; otherwise the winner pays the larger of $r$ and the second-highest valuation. Strict versus weak inequalities at the reserve have no revenue effect for continuous valuation distributions. This payment rule is distinct from a first-price sealed-bid auction.

Each bidder chooses a permitted amount. The bidder with the smallest amount submitted by exactly one bidder wins and pays that amount; if no amount is unique, nobody wins. With object value $V$, the winner's payoff is $V$ minus their bid, and losers pay nothing. Unlike a first-price sealed-bid auction, repeated lowest bids can be disqualified.

For bids $1,2$ and $V>2$, write $p_i$ for player $i$'s probability of bidding $1$. The two expected payoffs are $(V-1)(1-p_j)(1-p_k)$ and $(V-2)p_j{p}_k$. Their unique symmetric equilibrium uses the displayed probability. Every permutation of $(1,0,t)$, $0\le t\le 1$, is also a Nash equilibrium: the mixed bidder is indifferent, while the two pure bidders weakly prefer their prescribed bids. There are no further equilibria. Three interior probabilities must all coincide, since subtracting two indifference equations gives a nonzero positive factor times their difference. Two interior probabilities with a pure opponent are impossible, and a single interior probability requires the other two bids to differ. Thus the nonsymmetric equilibria form six line segments with six pure endpoints, and their number is uncountable.

In a standard all-pay auction, every player pays its bid or effort cost, and the highest bid receives the prize. With a value $v_i$, unit effort cost, and winning probability $x_i(b)$, player $i$ has quasilinear utility $v_i{x}_i(b)-b_i$. Equal highest bids require an explicit tie rule.

For effective prizes $A_1\ge A_2>0$ and unit effort costs, equilibrium effort CDFs on $[0,A_2]$ are $G_1(b)=b/A_2$ and $G_2(b)=1-A_2/A_1+b/A_1$. The weaker player has an atom at zero. Incremental utilities are $A_1-A_2$ and zero, and winning probabilities are $1-A_2/(2A_1)$ and $A_2/(2A_1)$. Direct payoff indifference and exclusion of larger bids verify the Nash equilibrium. A further player with effective prize at most $A_2$ cannot profit by entering against these distributions.

Each bidder submits one private bid; the highest bidder wins and pays its own bid, while losers pay nothing. A multi-unit version can award one item to each of the highest bidders, each paying its own bid. In a monotone symmetric equilibrium, a bidder can imitate another type's bid when checking incentive constraints.

In a first-price sealed-bid auction with at least two bidders, continuous nonnegative bids, quasilinear utility and positive private value $v$, no bid is a dominant strategy. Against opponents all bidding zero, any positive bid can be lowered while still winning, increasing the payoff. Bid zero fails against an opposing bid $v/2$, since bidding $3v/4$ earns $v/4>0$. Nor does randomizing create a dominant strategy. Against all-zero opponents, a random bid has expected payoff strictly below $v$ unless it is identically zero and receives the item with certainty under the tie rule. In the strict case, a sufficiently small positive fixed bid earns more. In the exceptional case, the deviation against $v/2$ again improves the payoff. Finite expected utility is implicit; an expected payoff of negative infinity cannot dominate finite-payoff bids. The positive-value condition matters: a zero-value bidder weakly prefers bid zero.

For $n\ge 2$ risk-neutral bidders with independent uniform valuations on $[0,1]$, this rule is a symmetric Bayesian Nash equilibrium. If opponents use $\beta (v)=av$, a bid $b\in [0,a]$ has expected utility $(v-b)(b/a{)}^{n-1}$. Its derivative has the sign of $(n-1)v-nb$, so with $a=(n-1)/n$ the best bid is $av$. Bids above $a$ guarantee winning but only increase payment. The type-$v$ equilibrium utility is $v^n/n$.

For a risk-neutral single-parameter bidder with incentive-compatible type reports, interim utility satisfies $u^{\prime }(\theta )=G(\theta )$ wherever the winning probability is continuous. Consequently expected payment is determined by allocation probabilities and the utility of the lowest type. The common normalization $u(0)=0$ must be justified, not obtained from allocation alone.

Two auctions with the same interim allocation probabilities and the same lowest-type utilities have the same interim expected payments under the usual risk-neutral single-parameter incentive conditions. Equal realized payments are not required. This conclusion follows directly from the interim payment identity.

A private-value auction gives each bidder its own value for receiving an item; the value is determined by its own type rather than by another bidder's information. An independent private values model also assumes independence between types.

A bidder with unit demand values receiving one item but obtains no additional value from extra identical units. Selecting two winners means awarding one item to each of two bidders, not two units to one bidder.

This model assigns independent private valuation types to the bidders. Symmetry adds identical type distributions and bidder roles. These assumptions determine interim winning probabilities from the valuation distribution in a monotone symmetric equilibrium.

The independent private values model is symmetric when bidders have identical roles and draw their valuations independently from the same distribution. For revenue equivalence in the usual single-object setting, bidders additionally have risk neutrality and quasilinear utility. Under a strictly increasing symmetric equilibrium bidding rule, a type $v$ wins with probability $F(v{)}^{n-1}$.

// Target: mathematical-optimization.bigb

For two independent uniform valuations on $[0,1]$, optimal posted price revenue is $2/(3\sqrt{3})$, attained at $p=1/\sqrt{3}$. An English auction without reserve earns the expected minimum, $1/3$. With reserve $r\in [0,1]$, revenue is $r\mathrm{Pr}(\text{exactly one valuation exceeds }r)$ plus the expected smaller valuation when both exceed $r$, namely $1/3+r^2-4r^3/3$. It is maximized at $r=1/2$, giving $5/12$. Different reserve-dependent allocation probabilities explain why this differs from the no-reserve revenue without violating revenue equivalence.