Question
Please help me with this problem Suppose that three risk-neutral bidders are interested in purchasing a Princess Beanie Baby. The bidders (numbered 1 through 3)
Please help me with this problem
Suppose that three risk-neutral bidders are interested in purchasing a Princess Beanie Baby. The bidders (numbered 1 through 3) have valuations of $12, $14, and $16, respectively. The bidders will compete in different auctions; in each case, bids can be made in $1 increments at any value from $5 to $25.
(a)Which bidder wins an open-outcry English auction? What is the final price paid, and what is the profit to the winning bidder?
(b)Which bidder wins a second-price, sealed-bid auction? What is the final price paid, and what is the profit to the winning bidder? Contrast your answer here with that for part (a). What is the cause in the difference in profits in these two cases?
(c)In a sealed-bid, first-price auction, all the bidders will bid a positive amount (at least $1) less than their true valuations. What is the likely outcome of this auction? Contrast your answer with those of parts (a) and (b). Does the seller of the Princess Beanie Baby have any clear reason to choose one of these auction mechanisms over the other?
(d)Risk-averse bidders would reduce the shading of their bids in part (c); assume, for the purpose of this question, that they do not shade at all. If that were the case, what would the winning price (and profit for the bidder) in part (c)? Would the seller care about which type of auction she chooses? Why?
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