sealed bid auction. (Hint:Check that the bidder cannot gain by either
understating or overstating his or her reservation price in making his
or her bid.)
b. In the setting of independent, private values, the English and second-
bid auctions lead to identical bids and outcomes. Explain why.
c. The major auction houses allow buyers who will not be in attendance to
submit bids prior to the public auction. A representative of the house
bids on the buyer’s behalf up to but not in excess of the submitted bid.
A submitted bid of $1,200 could well win the item for a price of $900
when the bidding stops in the actual English auction. What is the
optimal submitted bid for a buyer with private value vi? Explain.- On a fateful week before Christmas, Paramount Pictures was praying for
box-office success for the costliest film it had ever produced. Before
opening, the film’s publicity had been all bad, centering on its out-of-
control production costs, its 195-minute length, and its uncertain appeal.
The film’s opening weekend showed a solid but not spectacular box
office ($28 million), and critics’ reviews ranged from favorable to mixed.
Fearing that box-office revenues would decline as weeks passed (the
pattern for most films), Paramount was impatient to close a deal for the
television broadcast rights while the film was faring well. In securing such
a deal, the studio had two options: (1) Auction the TV rights to the
highest bidder among the interested networks; or (2) negotiate a deal
directly with one of the major networks. Indeed, Paramount had
initiated negotiations with NBC, and the two sides were near a deal.
Typically, network deals allowed for an escalator provision that adjusted
the price paid depending on the size of the theater revenues. (If the
movie turned out to be a blockbuster, the price of the television rights
would be higher.) NBC’s final offer was to pay $30 million for the TV
rights, but only if there was no escalator clause. Although it thought hard
about auctioning off the rights, Paramount decided to close the deal
with NBC for the guaranteed $30 million.
a. What are the pros and cons of reaching a negotiated deal versus
auctioning the TV rights?
b. Do you think Paramount made the right choice? Explain briefly. - The Internal Revenue Service has organized a sealed-bid auction to sell
an office building whose owners have failed to pay back taxes.
a. As a real-estate developer, you estimate the value of the building to be
$2.9 million. You believe that a typical competitor’s bid will be in the
range of $2 million to $3 million (with all values in between equally
likely) and that bids are independent of one another. You are
considering bids of $2.4 million, $2.6 million, and $2.7 million. Which
bid provides the greatest expected profit against one other bidder?
Against two other bidders?
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