Competitive Bidding with Asymmetric Information

Abstract

This paper analyzes the problem of competitive bidding (via sealed tenders) under uncertainty when one of the parties knows the value of the prize with certainty. A real problem of this type has been reported in a case study by Woods. The equilibrium strategies are derived and characterized for computational purposes in terms of the solution to a related differential equation. An example is solved in detail and found to be rather surprising in terms of the relative strength it imputes to the position of the party with better information.