The role of the second prize in all-pay auctions with two heterogeneous prizes (Q6170022)

In this article, the authors study all-pay auctions with heterogeneous prizes and demonstrate that the equilibrium strategies might be rather complex. More precisely, the analysis focuses on the equilibrium profiles and expected payoffs for the case of three players. In Section 5, the authors assume that there two \(W\)-type players and a single \(S\)-type player. The following is valid: Proposition 5. Define \[ \alpha =\frac{\omega_2}{2\Delta (s)}\left (-2s_2+\omega_2+\sqrt{(2s_2-\omega_2)^2+4\Delta(s)(s_1-\omega_1)}\right ), \] where \(\Delta(s)=s_1-2s_2\) and note that \(\alpha \in [0,\omega_1]\). Consider the following functions \[ F_W(x)=\left \{ \begin{array}{l} 0,\: \: x<0\\ \frac{x}{\omega_2}, \: 0\le x \le \alpha\\ \frac{-s_2+\sqrt{s_2^2+\Delta(s)(s_1-\omega_1+x)}}{\Delta(s)},\: \: \alpha \le x \le \omega_1\\ 1,\: \: x>\omega_1 \end{array} \right. \] and \[ F_S(x)=\left \{ \begin{array}{l} 0,\: \: x<\alpha\\ \frac{x-\omega_2F_W(x)}{(\omega_1-2\omega_2)F_W(x)+\omega_2}, \: \alpha \le x \le \omega_1\\ 1,\: \: x>\omega_1. \end{array} \right.. \] If \(F_S\) is non-decreasing then the strategy profile \((F_S,F_W)\) is an equilibrium in which the \(W\)-type players randomize on the interval \([0,\omega_1]\) according to \(F_W\), and the \(S\)-type player randomize on the interval \([\alpha, \omega_1]\) according to \(F_S\). Under this equilibrium the expected payoff of both \(W\)-type players is \(0\), and that of the \(S\)-type player is \(s_1-\omega_1\).