Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Question
Chapter 15A, Problem 1E
To determine
To Explain: The auction design features that reduce the winner’s curse and thus reduces the strategic underbidding.
Expert Solution & Answer
Answer to Problem 1E
The features that reduce the winner’s curse have been explained.
Explanation of Solution
In an auction the winner would be the one who submits the highest bid and the winner’s curse happens when the bidder overestimates the asset and overpay for it. While bidding, if the winner’s curse is also considered and factored in, then the actual overpayment would not occur generally.
In order to avoid the winner’s curse the following guide lines may be followed:-
- It needs to be analyzed as to whether the asset has a common value element.
- A comparison of capabilities should be done between the bidders.
- While placing each bid, the consequences after winning the bid, should be analyzed by the bidder.
Economics Concept Introduction
Introduction: When the winning bid in an auction is more than the true worth of the item, then this tendency is called the winner’s curse.
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What is Revenue Equivalence Theorem for the standard auction types?
Explain how the strategic choice of reservation price can raise expected profitability yet threaten efficiency in an English auction.
You have three tickets to a Celtics game on a night that you are going to be out of town (so the value of unsold tickets is zero to you). There are only four possible buyers of a Celtics ticket. The table below lists the respective reservation prices of these four possible buyers:
Customer Reservation Price
1 $25
2 $35
3 $50
4 $60
a) How much revenue can you generate using the English auction mechanism from the sale of the first ticket? [Bids can be made in increments of $1.00]
b) How much revenue can you generate using the English auction mechanism from the sale of the second ticket? [Bids can be made in increments of $1.00]
c) How much revenue can you generate using the English auction mechanism from the sale of the third ticket? [Bids can be made in increments of $1.00]
d) How much total revenue can you generate using the English…
Chapter 15A Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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