(a)

ui(b1,b2;v1,v2) =vi – bi when bi > bj

ui(b1,b2;v1,v2) =½*(vi – bi) when bi = bj
ui(b1,b2;v1,v2) =–bi when bi < bj
Given vi the bidding function bi(vi), (b1(v1),b2(v2)) is BNE.

max pr{bi > bj(vj)}*(vi – bi) + pr{bi = bj(vj)}* ½*(vi – bi) + pr{ bi < bj(vj)}*(–bi)
bi

pr{bi = bj(vj)}* ½*(vi – bi) = 0 this term disappears because continuous function has probability of essentially 0
pr{bi > bj(vj)}*(vi – bi) + pr{ bi < bj(vj)}*(–bi)= 1

max π(vi,b(vi)) = vi*pr{bi > vj)} – bj

F(v) = probability of bi > bj(vj)
Payoff = π(vi,b(vi)) = F(v)*vi – bj
𝑣 𝑣 1 𝑣𝑖 2
bj = F(v)*vi – π = F(v)*vi – ∫0 𝐹(𝑥)𝑑𝑥 = F(v)*vi – ∫0 𝑥 𝑑𝑥 = vi 2 – *vi 2 =
2 2

b)
𝑣 𝑣2
Assume that we have two bidders, the solution of first-price auction was 2𝑖 while the solution of all-pay auction was 2𝑖 .
This means that a bidder would generally submit a lower bid in the all-pay auction than what he/she would submit in the
first-price auction. The intuition behind the difference is that the bidder would not only pays the highest bid (which is
the same to the first-price auction if he/she wants to win the item) but would have to pay his/her bid regardless of
“winning” the item in the all-pay auction.
And vi will decrease exponentially as the number of players increases.

c)
1 𝑣𝑖 1 𝑣𝑖2 1
∫0 𝑣 · 𝑑𝑣𝑖 = ∫0
2 𝑖 2
𝑑𝑣𝑖 = 6
2
1 𝑣𝑗 1 𝑣𝑗 1
∫0 2
𝑣𝑗 · 𝑑𝑣𝑗 = ∫0 2
𝑑𝑣𝑗 = 6
1 1 1
First Price Auction has the expected revenue: 6 + 6 = 3
1 𝑣𝑖 2 1
∫0 𝑑𝑣𝑖 =
2 6
2
1 𝑣𝑗 1
∫0 2 𝑑𝑣𝑗 =
6
1 1 1
All-Pay Auction has the expected revenue: 6 + 6 = 3
So both auctions generate the same expected revenue for the seller.