HW9 (Mon Nov 29) ECON2101 Fall 2010 Auction True or False

1.

A seller should always set the reserve price in an auction to be less than or equal to his/her valuation of the object. In an auction of a painting with resell value, an English auction is equivalent to a sealed bid second price auction.

2.

3. In a second price auction with private value, a risk neutral bidders best strategy is to bid ones own valuation.
4.

In private value auctions, if the format is changed from first price to second period, bidders will bid higher.

Multiple Choices 1. An antique cabinet is being sold by means of an English auction. There are four bidders, Holly, Penelope, Minnie, and Sheila. These bidders are unacquainted with each other and do not collude. Holly values the cabinet at $1,600, Penelope values it at $1,350, Minnie values it at $2,100, and Sheila values it at $1,100. If the bidders bid in their rational self-interest, the cabinet will be sold to a. Holly for about $1,600. b. Minnie for about $2,100. c. either Minnie or Holly for slightly more than $1,600. Which of them actually gets it is randomly determined. d. Minnie for slightly more than $1,600. e. None of the above. 2. A seller decides to sell an object by means of an English auction without a reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1/2 that the bidders value for the object is $400 and a probability of 1/2 that the bidders value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the sellers expected revenue from the auction? a. $175 b. $220 c. $400 d. $250 e. $100

3.

In which of the following auctions, one should not shade the bid? a. b. c. d. Private value English Auction Private value Dutch Auction Private value sealed bid first price auction Common value sealed bid first price auction with uncertainty about the value

Problems Consider a sealed bid first-price auction to auction away a book with only two bidders A and B. Each bidder knows exactly his own valuation for the book but does not know the other bidders valuation for the book (it is a private value auction). They think the other bidders valuation is uniformly distributed over the interval [0, 1]. Now suppose B uses the following strategy: B will always bid his valuation divided by 2, (That is, if Bs valuation is VB = 80, he will submit a bid of bB = 80/2=40). Assume that A picks his bid to maximize his expected payoff = [the probability of winning times the payoff when he wins]. The payoff when he wins is his valuation minus the price he has to pay. (A side comment: uniform distribution means the probability of a tie is zero, so we can safely ignore that case.)
a)

Given the above strategy of B, compare the following three strategies of A:

1. 2. 3.

A bids her valuation VA divided by 1. A bids her valuation VA divided by 2. A bid her valuation VA divided by 4.

Calculate the expected payoff of these strategies. Which strategy is the best among the three for A?
b)

(Extra 2 points) Please make an intelligent guess at what the equilibrium bids of this game are when A privately knows his valuation to be VA, and B privately knows his valuation to be VB?

c) (Extra 3 points) Show that your guess is indeed an equilibrium.