Deck 16: Auctions and Competitive Bidding

Question 1

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

A)English auction and Dutch auction
B)Sealed-bid auction and second-price auction
C)English auction and Vickrey auction
D)Vickrey auction and Dutch auction
E)Vickrey auction and sealed-bid auction

Answer 1

C

Question 2

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 thousand $)from the English [E(PE)] and sealed-bid [E(PS)] auctions would be:

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.

Answer 2

C

Question 3

In a sealed-bid auction under a private-value model,the winning buyer's bid is based on:

A)his reservation price which is equal to his expected profit from the transaction.
B)the quotation submitted by the second last bidder.
C)his expectations of the third-highest buyer value.
D)the expected price of the good that decreases with an increase in the number of bidders.
E)the highest outstanding value that is below his optimal value.

Answer 3

E

Question 4

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 5

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 6

Which of the following assumptions will lead 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 a dominant strategy
C)All risk-neutral buyers adopt the 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 7

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)the buyer is able to apprehend the true value of the item.
D)bidders become more risk averse.
E)the dispersion of estimates reduces.

Question 8

Three firms: Firm X,Y,and Z respectively,are participating in a competitive bidding process.Firm X somehow assesses that its rivals' bids will lie somewhere around $500-$600.What can be Firm X's optimal bid to fetch him 81% probability of winning the auction?

A)$550
B)$600
C)$590
D)$575
E)$581

Question 9

The best competing bid distribution curve for a bidding firm is useful since it _____.

A)estimates the competitors' reservation prices
B)precisely measures its 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 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 presence of more rivals.
E)if the buyer can assess the good's acquisition value by first discounting his/her original estimate.

Question 11

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 12

Which of the following is true in case of a competitive procurement?

A)A lower price increases a supplier's chance of being selected but reduces its potential profit.
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 13

The winner's curse occurs when:

A)the winning bidder is not at all optimistic.
B)the winning bid exceeds the true value of a good.
C)the losing 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 14

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 assessed by an individual bidder that is independent of other bidders.
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.

Question 15

Firm Z is one of the 4 bidders,each with a value independently drawn from the range $20,000 to $60,000.All values are equally likely.Let us consider bi and vi as the holding value and bidding value of the bidder 'i' respectively.Therefore,in a sealed-bid auction,Firm Z's equilibrium bidding strategy will be_____.

A)b_i = (0.25)(40,000)+ 0.75v_i
B)b_i = (0.5)(20,000)+ 0.5v_i
C)b_i = (0.5)(40,000)+ 0.5v_i
D)b_i = (0.25)(20,000)+ 0.75v_i
E)b_i = (0.75)(20,000)+ 0.25v_i

Question 16

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

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 bidder takes a decision under uncertainty.
D)The final price is approximately equal to the second highest buyer value.
E)The first bidder obtains the item getting auctioned at the current price.

Question 17

Auctions are a viable method of selling an item:

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

Question 18

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 0.75,then its expected profit from the auction is _____.

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

Question 19

Assuming a uniform distribution of offers between $100,000 and $175,000,what would be the maximum expected price from nine potential buyers?

A)$125,000
B)$137,500
C)$155,000
D)$167,500
E)$175,000

Question 20

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

A)Revenue equivalence will get disrupted.
B)Buyers will bid up the price close to their reservation values.
C)Sealed bid auction will yield better expected revenue than English auction.
D)Buyers will employ non-identical bidding strategies.
E)The winner's optimal bid is just enough to guarantee winning the auction.

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

If there is a private-value model with risk-neutral buyers,what can be inferred regarding the expected revenues generated by English and sealed-bid auctions?

Question 26

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

Question 27

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

Question 28

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

Question 29

If the personal values of buyers' are drawn from different distributions,then which of the following can be rightly inferred?

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

Question 30

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

Question 31

The reserve price serves two related purposes.One of them is to elevate the final bid price.The other one is _____.

A)to raise the seller's personal value for the item
B)to protect the seller from auctioning the good for too low a price
C)to ensure that the highest bid remains identical for any type of auction
D)to reach equilibrium bid-price level in case of asymmetric distribution of private value
E)to keep the bid-price level within the maximum private value in the auction

Question 32

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 33

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

Question 34

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

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

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

Question 37

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

Question 38

A particular good was withdrawn from the market after the bid was made.This implies:

A)the highest bid in the auction did not exceed the seller's minimum.
B)the lowest bid in the auction did not exceed the seller's maximum.
C)the government started intervening in the situation.
D)the personal value of the seller was met.
E)the seller was successful in demanding a price in excess of her reservation value in the negotiation.

Question 39

There are three firms (Firm 1,2,and 3)in a competitive procurement,each with independently-drawn costs.All costs are in between the range $300,000-$400,000 and are considered equally likely.Here,??????b1= sealed bid amount of firm 1 and c1= firm 1's costs (Both in $ thousand).Then accordingly,firm 1's optimum equilibrium strategy would be:

A)b₁ = c₁.
B)b₁ = (0.5)(300,000)+ 0.5c₁.
C)b₁ = (0.5)(400,000)+ 0.5c₁.
D)b₁ = (1/3)(300,000)+ (2/3)c₁.
E)b₁ = (1/3)(400,000)+ (2/3)c₁.