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

This 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.