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4. In this exercise, you will explore how much setting a reserve price can increase the seller's expected revenue. Two bidders i = 1, 2
4. In this exercise, you will explore how much setting a reserve price can increase the seller's expected revenue. Two bidders i = 1, 2 have (uncorrelated) private values that are uniformly distributed over the interval from 0 to 1. The figure below illustrates the four basic possible outcomes. First, if V rand V r) x Prob(V< r) = (1-r) xr=r-r. Third, if V r (Region III), then bidder 2 wins and pays r; this also happens with probability r- r. Finally, if V >r and V >r (Region IV), then the bidder with the higher value wins and pays the lower value; this happens with probability (1-r)2, and when it happens, the price on average equals 2r+1 3 32
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