5. Second-price auction strategies Suppose Manuel is a movie buff at an auction for rare and unusual items and is debating how much to bid on the original shoes worn by Dorothy in The Wizard of Oz. The format of the auction is sealed-bid second-price; that is, the highest bidder wins the object and pays the amount bid by the second-highest bidder. He values the shoes at $900 but is thinking of placing a bid (b1) for $750 in hopes of capturing a greater share of consumer surplus. To evaluate whether it is better to bid his full valuation (b = $900) or some lower amount (in this case, b = $750), compare the outcomes under the following three possible scenarios: Scenario 1: Suppose the highest bid placed among the other bidders (b2) is less than $750. If he bids $750, she pays a price of . If he bids $900, he wins the shoes and pays a price of Scenario 2: Now suppose b2 is somewhere between $750 and $900. If he bids $750, she he bids $900, he wins the shoes and pays a price of the shoes and the shoes and pays a price of If Scenario 3: Finally, suppose b is greater than $900. Regardless of whether Manuel bids $900 or $750, he does not win the shoes and thus he pays nothing. The following table illustrates Manuel's two actions in each of these three scenarios with potential values for b within the ranges from each scenario. Complete the table by choosing the correct payoff he receives in each of the six scenarios. (Note: His payoff is equal to his valuation [if he wins the shoes] minus the price he pays for the shoes.) Other Highest Bidder Scenario 1 b2 = $600 Scenario 2 b2 = $800 Scenario 3 b2 = $950 Manuel b = $750 b = $900 You can see that bidding his full valuation ($900) results in a payoff that is bidding $750. the payoff from True or False: If instead this was a sealed-bid first-price auction, the seller of the item would (in general) receive a higher price for the shoes. True False Grade It Now Save & Continue Continue without saving