9781118041581

Answers to Odd-Numbered Problems 33

deterrence allows the astute bidder to obtain films at bids below their

full value with the effect that the seller’s revenue is reduced. What if

the astute bidder were excluded from the bidding? The equilibrium

bids of the uninformed bidders are b E(v). Each buyer’s expected

bidding profit is zero, and the seller obtains a price that reflects the

full value of the movie. The seller gains by excluding the astute

bidder, thereby removing the information asymmetry.

9. a. In sequential bidding for identical items, a potential buyer must
   decide whether or not to try to win the first item or try to get the
   second, third,... or last item more cheaply. In equilibrium, one
   would expect all items to sell for the same expected price. (If
   expected prices differed, buyers would change their bidding behavior,
   evening out the prices.)
   b. When items can be bought as a lot, the high initial bidder may take
   one item, some items, or all items at the bid price. Leftover items are
   reauctioned and typically sell for lower average prices. The risk of
   waiting for a lower price is that there may be no items left. In this
   sense, the procedure resembles a Dutch auction.


10. a. From Table A we can compute the expected profit for any bid by
    multiplying the bid markup by the fraction of bids won. For example,
    the expected profit from bidding at a 60 percent markup is
    (9/17)(60) 31.76. This is the greatest expected profit for any bid.
    (By comparison, the expected profits from 50 percent and 70 percent
    markups are 29.17 and 27.39, respectively.)
    b. Table B lists a total of 128 lowest competing bids. If Reliant Press
    were to use a 20 percent markup, it would lose to only 6 of these 128
    LCBs (i.e., bids with markups of 19 percent or below). Thus, the
    firm’s expected profit is (122/128)(20) 19.06. If it bids 50 percent,
    its expected profit is (84/128)(50) 32.8. If it bids 60 percent, its
    expected profit is (64/128)(60) 30.0. If it bids 70 percent, its
    expected profit is (47/128)(70) 25.7. The 50 percent markup
    offers the greatest expected profit of all alternatives (with the 60
    percent markup a close second). The distribution of LCBs represents
    more complete information than the number of wins in Table A. The
    latter table has only a small number of observations for each bid.
    Because of random factors (bids just winning or just losing), the
    recorded fraction of winning bids might vary considerably from the
    “true” long-run win probability.


11. a. At an English auction, the expected price is

$320 thousand.

(2/3)(300)(1/3)(360)

[2/(n1)]300[(n1)/(n1)]360

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