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Assignment

This document contains an assignment with 3 questions regarding auctions from a managerial economics course. Question 1 involves a rare coin being auctioned through different auction formats and calculating revenue. Question 2 examines bidding strategy in a first price auction. Question 3 compares different auction formats and identifies the optimal format from the perspective of a business manager.

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Junaid Patel
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98 views

Assignment

This document contains an assignment with 3 questions regarding auctions from a managerial economics course. Question 1 involves a rare coin being auctioned through different auction formats and calculating revenue. Question 2 examines bidding strategy in a first price auction. Question 3 compares different auction formats and identifies the optimal format from the perspective of a business manager.

Uploaded by

Junaid Patel
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MG207 Managerial Economics

London School of Economics

LT Assignment 7: Auctions

Question 1
Wilma has a rare coin for sale. Yussuf, and Zhou value the coin at £100 and £200
respectively.

Part a
Wilma offers the coin through a first price sealed bid auction. Is there a dominant bidding
strategy for any bidder?

Part b
Wilma offers the coin through a second price sealed bid auction. Is there a dominant
bidding strategy for any bidder? Find a set of bids that constitute Nash equilibrium.
How much will Wilma earn from this auction?

Part c
Suppose now that Wilma has a large number of those coins. She plans a series of second
price sealed bid auctions for coin collectors. Coin collectors are of two types: half are like
Yussuf who value a coin at £100, and the other half are like Zhou who value it at £200.
A coin is on offer in each auction which is attended by exactly two bidders, each of whom
can be either of the two types. Assume that bidding behavior in an auction is independent
of other auctions. When there are two equal highest bids, the coin is allocated randomly
to one of the bidders who pays the other bidder’s bid. What is Wilma’s average expected
revenue per auction?

Part d
Wilma decides that she can sell the coins later in a shop at a posted price of £150.
Therefore she decides to put forward a ”shill bid”, i.e. a fake bid, of £150 in each of her
auctions. How does this change the answer to part (c)?

Question 2
Suppose N players are bidding in a first price auction with independent private valuation.
Each player’s valuation is independently drawn from U (0, 1), i.e., uniform distribution
within the interval [0, 1]. Denote any player i’s valuation as vi , where i = 1, 2, ..., N .

1
Show that the Nash equilibrium bidding strategy in the first price auction with inde-
pendent private valuation is b(vi ) = NN−1 vi . (Hint: Since all players are ex ante identical,
the equilibrium is symmetric in the sense that the equilibrium bidding functions are the
same for all players. Also, assume the bidding strategy is linear, i.e., b(vi ) = cvi where c
is a constant to be determined.)

Question 3
Suppose N > 2 individual bidders participate in an auction for a personalized meal from
a famous chef. The bidders have independent private valuations.

Part a
Which of the following auction formats are equivalent to one another in terms of prices
and allocations: a) second price sealed bid; b) descending open (Dutch); c) first price
sealed bid; d) ascending open (English).

Part b
Suppose you are the business manager for the chef and you know that both the chef
and the wealthy bidders are risk neutral. Which auction format would you choose to
maximize expected profit? Why is the format you chose better than the other formats?

Part c
For each format in part a, identify the price that wins the auction.

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