Deck 17: Auctions and Competitive Bidding Available Online

Question 1

Firm Z is one of 4 bidders, each with a value independently drawn from the range $20,000 to $60,000 with all values in between being equally likely. In a sealed-bid auction, Firm Z's equilibrium bidding strategy is:

A) b_i = (.25)(40,000) + .75v_i
B) b_i = (.2)(20,000) + .8v_i
C) b_i = (.5)(40,000) + .5v_i
D) b_i = (.25)(20,000) + .75v_i
E) b_i = (.75)(20,000) + .25v_i

Answer 1

D

Question 2

In a sealed-bid auction, a firm with a reservation price of $48,000 submits a bid of $40,000. If its probability of winning is .75, then its expected profit from the auction is:

A) $8,000.
B) $2,000.
C) $6,000.
D) $4,000.
E) $2,500.

Answer 2

C

Question 3

The reservation price of the good at an auction denotes:

A) the initial bid price set by the seller in an English auction.
B) the value for the item assessed by an individual bidder.
C) the average bid price of the good quoted by the different bidders.
D) the minimum price for the good that is expected by the seller.
E) the buyer's optimal bid in a sealed-bid auction.

Answer 3

B

Question 4

When buyers hold private values, which of the following conditions leads to identical expected revenues under the English, sealed-bid, Dutch, and Vickrey auctions?

A) The true value of the good being auctioned is uncertain.
B) Some buyers adopt dominant strategies.
C) All risk-neutral buyers adopt equilibrium bidding strategies.
D) The probability that all competitors will choose the same bidding strategy is zero.
E) There are a large number of bidders with different reservation prices.

Question 5

Assume that there are 9 bidders with reservation prices independently and uniformly distributed between $100,000 and $180,000. What is the expected value of the highest reservation price of the nine potential buyers?

A) $140,000
B) $160,000
C) $164,000
D) $172,000
E) $175,000

Question 6

Auctions are a viable method of selling an item when:

A) one-on-one negotiation with a buyer is not possible.
B) the seller is not practicing monopoly.
C) a competitive market fails to exist.
D) the item is non-differentiated.
E) posted pricing under uncertain environment cannot take place.

Question 7

In a sealed-bid auction with private values drawn independently from a common distribution, each buyer's equilibrium bid is set equal to:

A) his reservation price.
B) the expected reservation price of the other bidders.
C) the expectation of the third-highest buyer value.
D) the expectation of the second-highest buyer value.
E) the expectation of the next-highest buyer value conditional on it being smaller than the bidder's value.

Question 8

The potential size of the winner's curse increases as:

A) the degree of uncertainty about the value of the item increases.
B) the number of bidders declines.
C) buyers are better able to assess the true value of the item.
D) buyers become more risk averse.
E) the value of the item up for bid increases.

Question 9

The best competing bid distribution curve is useful for a bidding firm because it:

A) estimates the competitors' reservation prices.
B) precisely measures the firm's own winning chances for its various bids.
C) estimates the probability that a competitor will follow a particular bid strategy.
D) measures the risks associated with a particular bid.
E) measures the profit derived from the winner's final bid.

Question 10

The problem of the winner's curse can be avoided:

A) if the scope of uncertainty increases among the bidders.
B) by increasing the number of bidders.
C) by increasing the range of actual estimates and bids.
D) if the buyer bids more aggressively in the presence of more rivals.
E) if the buyer assesses the good's acquisition value by first discounting his/her original estimate.

Question 11

A manager recommends selling one of the firm's divisions to a prospective buyer through bargaining, rather than soliciting competitive bids from other firms. Does this strategy make sense?

A) Yes, it is quicker, less expensive, and, is likely to provide a better price than a bidding competition.
B) No, soliciting competing bids is a better option for the seller than negotiating with a single buyer.
C) No, competitive bids will provide a better price, provided there are very few buyers.
D) Yes, there is certainly room for a mutually beneficial agreement.
E) Yes, the firm can obtain a much higher sale price by undertaking this strategy rather than putting the division up for competitive bid.

Question 12

The winner's curse occurs when:

A) buyers are realistic in their value estimates.
B) the winning bid exceeds the true value of a good.
C) the contract bidder experiences frequent cost overruns.
D) the winning bid is drawn from the left tail of the bid distribution.
E) the firm's bid discount exceeds its (upward) estimation error.

Question 13

There are five risk-neutral bidders, each having a private value that is independently drawn from the range $60 thousand to $120 thousand with all values in between equally likely. The respective expected revenues (in $ thousands) from the English and sealed-bid auctions are:

A) E(P_E) = $100 and E(P_S) = $110.
B) E(P_E) = E(P_S) = $96.
C) E(P_E) = E(P_S) = $100.
D) E(P_E) = $96 and E(P_S) = $108.
E) E(P_E) = E(P_S) = $110.

Question 14

Which of the following is true in a competitive procurement?

A) A lower price increases a supplier's chance of being selected but reduces its potential profit upon winning.
B) A lower price reduces a bidder's chance of winning as well as its potential profit.
C) A higher price increases a bidder's chance of winning as well as its potential profit.
D) A lower price reduces a supplier's chance of being selected but increases its potential profit.
E) A lower price increases a supplier's chance of being selected as well as raises its potential profit.

Question 15

An auction which is characterized by descending bids is known as a(n):

A) English auction.
B) Dutch auction.
C) French auction.
D) sealed-bid auction.
E) second-price auction.

Question 16

Three firms are participating in a sealed-bid auction. Firm X assesses that each rival's bid will lie between $500 and $600, with all values equally likely. What bid should Firm X submit if it seeks to gain a 64% probability of winning the auction?

A) $550
B) $560
C) $564
D) $575
E) $580

Question 17

Which of the following is incorrect?

A) An auction ensures that competition among buyers sets the final price-the highest price the market will bear.
B) An auction is less flexible than posted pricing.
C) An auction is less time-consuming than rounds of one-on-one negotiations.
D) An auction allows the seller to compare all buyer offers simultaneously and choose the best one.
E) An auction preserves the seller's monopoly position.

Question 18

Assume that there are 9 bidders with reservation prices independently and uniformly distributed between $100,000 and $180,000. What is the expected value of the sale price at an English auction?

A) $140,000
B) $160,000
C) $164,000
D) $172,000
E) $175,000

Question 19

Which of the following auctions are strategically equivalent for bidders holding private values?

A) The English and Dutch auctions.
B) The sealed-bid and second-price auctions.
C) The English and Vickrey auctions.
D) The Vickrey and Dutch auctions.
E) The Vickrey and sealed-bid auctions.

Question 20

Which of the following is true of an English auction with private values?

A) The bid value can exceed the reservation price of the buyer who wins.
B) A typical buyer shades his/her bid below the true private value.
C) A buyer's optimal bid strategy depends on the bidding behavior of other buyers.
D) The final price is approximately equal to the second highest buyer value.
E) None of these answers is correct.

Question 21

There are three suppliers competing in a competitive procurement, each with independently-drawn costs. Each firm's cost is in the range, $300,000-$400,000, with all costs in this range considered equally likely. Here, ??????b1= sealed bid amount of firm 1 and c1= firm 1's costs (Both in $ thousand). Then, firm 1's optimum equilibrium strategy is:

A) b₁ = c₁.
B) b₁ = (.5)(300,000) + .5c₁.
C) b₁ = (.5)(400,000) + .5c₁.
D) b₁ = (1/3)(300,000) + (2/3)c₁.
E) b₁ = (1/3)(400,000) + (2/3)c₁.

Question 22

Compare the strategies bidders employ when participating in the English, sealed-bid, and Dutch auctions.

Question 23

An item with a common unknown value is being sold via an English auction. Is there any possibility of winner's curse? Explain.

Question 24

Discuss the advantages of auctions as a type of transaction compared with posted prices and negotiated transactions.

Question 25

What are the conditions suitable for a seller to use an auction? Explain.

Question 26

If buyers' private values are drawn from different distributions, then which of the following statements is incorrect?

A) Revenue equivalence will no longer hold.
B) In an English auction, each buyer will be willing to bid up to its reservation price if necessary.
C) The sealed bid auction will yield greater expected revenue than English auction.
D) Buyers will employ identical bidding strategies.
E) In an English auction, the allocation of the item is efficient.

Question 27

If the personal value of one of the buyers is drawn from a distribution with a higher range of values than the other buyers, then which of the following statement is correct?

A) Expected revenue of the English auction will be equal to that of the sealed-bid auction.
B) Expected revenue of the English auction will be greater than that of the sealed-bid auction.
C) Expected revenue of the sealed-bid auction will be greater than that of the English auction.
D) Expected revenue of the sealed-bid auction will be smaller than that of second-price auction.
E) Expected revenue of the Vickrey auction will be greater than that of sealed-bid auction.

Question 28

A reserve price serves two related purposes. One is to elevate the expected final bid price. The other purpose is to:

A) increase the seller's personal value for the item.
B) protect the seller from auctioning the good for too low a price.
C) ensure that the highest bid is the same for any type of auction.
D) attract a greater number of buyer to the auction.
E) increase the typical buyer's personal value for the item..

Question 29

A dealer, who buys items at antique auctions every week, notices a consistent pattern in large antiques auctions. Items auctioned in the first 30 minutes and in the last 30 minutes tend to fetch lower than expected prices. Items in the middle of the auction claim relatively high prices.
(a) If the dealer's observation is correct, are antique buyers behaving rationally?

Question 30

What is a reserve price? State its purposes and explain how it is advantageous from the seller's point of view.

Question 31

(a) In a sealed-bid auction, there are three firms bidding. Each firm's bid lies within the range $25 million to $35 million, with all values in between equally likely. If the first firm bids $30 million, what is the probability that its bid is the highest?

Question 32

How does a bidder's risk aversion affect on respective bidding strategies in the English and sealed-bid auctions?

Question 33

In a private-value model with risk-neutral buyers, compare the expected revenues generated by English and sealed-bid auctions.

Question 34

What circumstances cause the sealed-bid auction to generate greater revenue than the normal sealed-bid auction?

Question 35

Suppose four bidders compete in a sealed-bid auction with private values independently and uniformly distributed between $0 and $200.
(a) Compute the expected revenue in an English auction.

Question 36

What are incentive contracts? Explain why and when a buyer writes an incentive contract.

Question 37

(a) Consider a sealed-bid auction where the reservation price of a firm is $7.5 million, its bid is $7 million, and the probability of winning at this bid is .4. Calculate the firm's expected profit.

Question 38

Explain with an example the potential benefit of competitive bidding versus bargaining to secure a better price by a seller.

Question 39

The U.S. Beanbag Federation is accepting bids for televising the national championship playoffs. Competition is stiff, and the Federation expects bids to be higher this year than last. Officials of the Federation have estimated that the advertising revenue that a network might receive ranges from $500 million to $700 million (with all values in between equally likely).
(a) If the three major networks bid, what is the expected value of the winning bid?

Question 40

A particular good was withdrawn from the market after bids were opened. This implies that:

A) the highest bid in the auction did not exceed the seller's minimum reserve price.
B) the lowest bid in the auction did not exceed the seller's maximum price.
C) the government chose to intervene.
D) the personal value of the seller was met.
E) the seller intended to negotiate a sale to a favored buyer.

Question 41

Compare bidder strategies in an English auction versus a sealed-bid auction.