Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 23

CPT Inc. is a local manufacturer of conveyor systems. Last year, CPT sold over $2 million worth of conveyor systems that netted the company $100,000 in profits. Raw materials and labor are CPT' s biggest expenses. Spending on structural steel alone amounted to over $500,000, or 25 percent of total sales. In an effort to reduce costs, CPT now uses an online procurement procedure that is best described as a first-price, sealed-bid auction. The bidders in these auctions utilize the steel for a wide variety of purposes, ranging from art to skyscrapers. This suggests that bidders value the steel independently, although it is perceived that bidder valuations are evenly distributed between $8,000 and $25,000. You are the purchasing manager at CPT and are bidding on three tons of six-inch hot-rolled channel steel against four other bidders. Your company values the three tons of channel steel at $16,000. What is your optimal bid?