DIS 12 Handout Solutions

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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Q ) (200 ) 250 (0.80 0.004 ) Q Q Q Q π =- =-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 player’s strategy....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online