9781118041581

just outbidding the highest possible bid of firm 2. In sum, firm 1’s

equilibrium bidding does very well (is nearly optimal), even if the

competitor pursues nonequilibrium bidding strategies.

4. The less well-informed buyer must be wary of the winner’s curse. Any
   time that the buyer wins the bidding, it must be because the better-
   informed rival has made a lower bid knowing that the item’s value is low.
   The disadvantaged buyer only wins low-value items and tends to overpay
   for them. It is best to stay out of the auction altogether.


5. The expected price at the English auction is (.4)(0) (.6)(100) $60.
   In the sealed-bid auction, bids are bi[(n 1)/n]vi .75vi. Thus,
   E(bmax)  .75E(vmax), since the buyer with the highest value makes the
   highest bid. From Equation 16.5, E(vmax) [n/(n 1)]100 80.
   Therefore, E(bmax) (.75)(80) $60. The auctions deliver the same
   expected revenue.

706 Chapter 16 Auctions and Competitive Bidding

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