Procurement with a Strong Insider

We consider a procurement auction with a “strong” insider and outside bidders. Within the confines of uniformly distributed independent private values, we compare a standard second price auction with a “tournament” in which the outsiders bid first to win the right to compete with the insider. The bids of the outsiders are binding and the highest bidder proceeds to a second-price competition with the insider. We take the insider to be “sufficiently strong” relative to the insiders. The outsiders bid above their values and the expected revenue exceeds that of the standard second price auction. This is true for any finite N, and in the limit as N grows large.