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 auctions as described
in parts (a) through (d); 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 are the final
price paid and the profit to the winning bidder?
(b) Which bidder wins a second-price sealed-bid auction?What are the final
price paid and the profit to the winning bidder? Contrast your answer
here with that for part (a). What is the cause of 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 in this auction? Contrast your answer with those for 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 othed
(d) Risk-averse bidders would reduce the shading of their bids in part (c);
assume, for the purposes of this question, that they do not shade at all.
If that were true, what would be the winning price (and profit for the
bidder) in part (c)? Does the seller care about which type of auction she
chooses? Why?
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 auctions as described
in parts (a) through (d); 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 are the final
price paid and the profit to the winning bidder?
(b) Which bidder wins a second-price sealed-bid auction?What are the final
price paid and the profit to the winning bidder? Contrast your answer
here with that for part (a). What is the cause of 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 in this auction? Contrast your answer with those for 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 othed
(d) Risk-averse bidders would reduce the shading of their bids in part (c);
assume, for the purposes of this question, that they do not shade at all.
If that were true, what would be the winning price (and profit for the
bidder) in part (c)? Does the seller care about which type of auction she
chooses? Why?