11. winners curse Suppose our bidding illustration has = 0, = = 10. Plot...

11. winner’s curse Suppose our bidding illustration has α = 0, β = γ = 10. Plot firm 1’s bid as a function of y. (Glance back at Example 10.7!) Also plot firm 1’s expected cost, given it has observed y, on the same graph.

Finally, plot firm 1’s expected cost, given it has observed y, bid as noted, and won the bidding.

(a) Carefully explain the relationship among the three graphs.

(b) We interpret this as an instance of cost plus pricing. Assume cost is defined as in the second graph, i.e., as firm 1’s expected cost given it has observed y. What explains the amount that is added to this cost estimate to determine firm 1’s bid?