191T11 - ECON191 (Spring 2010) 13, 14 & 17.5.2010...

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1 ECON191 (Spring 2010) 13, 14 & 17.5.2010 (Tutorial 11) Chapter 14 Externalities and Public Goods (Chapter 18 of Textbook) Strategic behavior: Demand revealing mechanism In the Lindahl solution, people will have incentive to misrepresent their preferences, some mechanisms are designed to reduce the problem of misrepresentation. Auctioning is one of the significant mechanism in the problem of information revelation Under these mechanisms, people are better off to reflect their preferences honestly, though difference mechanisms helps to increase people’s incentive to truly reveal to different extents Questions: Does the highest bid fully reflect the highest value among the bidders? Can the seller guarantee that he can get the highest amount that the bidders are willing to pay? (1) English auction (simple progressive auction) Bids are freely made an announced publicly until no purchaser wishes to make any further bid. A rational bidder participates if and only if he can win the auction with a bid that is less than his reservation value and drops out if the bid on the floor equals or exceed his reservation value. Bids in the English auction depend on individual reservation values and observed bids on the floor. The result is the bidding stops at a price approximately equal to the second highest value among all the bidders since at that price there will be only one bidder left in the bidding process. Every bidder in an English auction will only bid his reservation value. Under the English auction, the one who valued the good most will win, however we will not be able to tell the value of the highest bidder exactly. An English auction is isomorphic (identical result with different form of auction) to the second-price sealed bid auction. (2) Second-price sealed bid auction The highest bidder wins the object and pays only the second higher bid. In both the English auction and second-price sealed bid auction, all bidders have no incentive to bid differently from their reservation values. We could show that bidding one’s reservation value is a dominant strategy, it does not matter whether the bidders have information about one another’ reservation values. In other words, if bidders only know their own valuations, it is still optimal for them to bid their own reservation values. Identical result with different form of auction) to the English auction. (3) Dutch auction
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191T11 - ECON191 (Spring 2010) 13, 14 & 17.5.2010...

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