Movie distributors sell films to local exhibitors via sealed competitive bids. Exhibitors complain about the system of “blind” bidding—that is, they are often forced to bid on a film sight unseen (before the film is even completed). At the risk of oversimplifying, suppose a typical film might be worth $10,000 per week (a hit), $6,000 (OK), or $2,000 (a dog). Each of these outcomes is considered equally likely for the typical unseen film.
a. Suppose three risk-neutral exhibitors are bidding for a film. What is the expected value of the typical film under blind bidding? In a sealed-bid auction where equilibrium bids are placed, what is the distributor’s expected revenue from the competition? Could the distributor increase its expected revenue by delaying the bidding until after the film can be viewed (so its value will be known)? Explain. How do your answers change if exhibitors are risk averse?
b. Could a distributor increase its expected revenue by selectively screening only its best films but making the bidding on the rest of the films blind?
c. Suppose three exhibitors bid for a film after viewing it. Exhibitor A is extremely astute and so can make a precise prediction of the film’s value. Exhibitors B and C have only imprecise information about this value. Could the distributor increase its expected revenue by excluding one of the bidders? If so, which one?