The Influence of Privacy Cost on Monotonic Increasing Strategies in Sealed Bid First and Second-Price Auctions

This paper approaches first and second-price sealed-bid auctions from the point of view that bidding reveals one’s valuation, and hence comes with a privacy cost which depends on the valuation estimate. The privacy cost applies even if the sale is lost, and negative pay-offs, not possible in regular auctions, are possible. Hence auctions with privacy cost are not equivalent to regular auctions with lower valuations. This paper shows that second-price sealed-bid auctions with privacy costs do not have a dominant strategy. Further, it shows that privacy costs lower expected revenues in both first and second-price auctions, and that, when privacy costs are low enough, bidders pass on all privacy costs to the seller. It concludes that the seller might often benefit by providing privacy-protecting technology while executing an auction, so as to increase revenue by reducing the bidder’s privacy cost.