DIS 12 Handout Solutions - Q ) (200 ) 250 (0.80 0.004 ) Q Q...

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HO12 (solutions) 1. The winner’s curse arises in auctions in which bidders have common values. The bidder who wins the auction must have submitted the highest bid and therefore must have had the most optimistic estimate of the value of the object. The winning bidder will have almost surely overestimated the value of the object he or she is bidding on. Thus, the winner may suffer from the winner’s curse – bidding more for the object than the item’s intrinsic value. 2. From the given information, the profit from winning the auction is (assuming you bid
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Unformatted text preview: Q ) (200 ) 250 (0.80 0.004 ) Q Q Q Q =- =-At the optimal bid marginal profit equals zero. Thus, at the optimum, the bid must satisfy 0.80 0.008 0.008 0.80 100 Q Q Q-= = = The optimal bid is therefore 100, which is equal to one-half of your true valuation, 200. Thus, a strategy of bidding one-half of your valuation is a Nash equilibrium; it is the best you can do given the other players strategy....
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