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auctions2 - Economics 100B Instructor Ted Bergstrom x T.A...

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Economics 100B Instructor: Ted Bergstrom T.A. Oddgeir Ottesen Syllabus online at www.econ.ucsb.edu (Class pages) Or at www.econ.ucsb.edu\~tedb (Econ 100B)
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Don’t forget to register with Aplia First homework assignment due Sunday night. Instructions for signing up on class website.
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Let’s get registered
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Have you ever bid for anything on eBay? A) Yes, frequently B) Yes, but not frequently C) No
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An Oil Auction This illustrates a “common value auction” in which different bidders have partial information about the value of object being auctioned. Two bidders. Each has explored half of the oil field. Whole oil field is up for bids.
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Auction Details Coin flips determine value of each side $3 m if head, $0 if tails. Bidder A sees result only for side A Bidder B sees result only for side B Bidders submit sealed bid for the whole oil field (both sides)
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Is this oilfield auction a common value auction or a private values auction? A) Common Value B) Private Values
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Answer This is a common values auction. The oilfield is worth the same amount to whoever gets it. The only difference between the bidders is that they have different bits of information. This would be a private values auction if e.g. one firm could use the oilfield more effectively than the other.
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In this auction, if you are Player A and you see that your side of the field is worth $0, could you make a profit by bidding $3 million or more? Yes, this would be a good strategy. Yes, but chances are low, so this is not a good strategy. No, I could never make money and I may lose money with such a bid.
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In this auction, if you are Player A and your side of the oilfield is worth zero, what is your expected value for the whole field? A) $3,000,000 B) $6,000,000 C) $4,500,000 D) $1,500,000 E) $0
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Expected Value is sum of possible values times probabilities of each value.
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