On a Modification of the Multistage Bidding Model with Continuous Bids and Asymmetric Information

Abstract

This paper considers a modification of the multistage bidding model with continuous bids. Bidding takes place between two players for one unit of a risky asset (one stock). Player 1 knows the real price of the asset while Player 2 knows only the probabilities of high and low prices of the asset. At each stage of the bidding, players make real valued bids. The higher bid wins, and one unit of the risky asset is transacted to the winning player. The price of the transaction is a convex combination of the bids with a given coefficient. The optimal strategies of the players and the value of the n-stage game are found.