Pre-auction strategic communication

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.