Three individuals are bidding for a house. The individuals' private values are V₁ = $298,000, V₂ = $310,000 and V₃ = $322,000. It is generally believed that the lowest and highest possible values of the house are $250,000 and $350,000, respectively. Individual 1's optimal strategy is to submit a bid of:

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In a common value auction scenario like this, where bidders have private information but also share a common value range for the item (in this case, the house), the optimal strategy often involves shading one's bid below the private value to account for the winner's curse. The winner's curse suggests that the winning bid often exceeds the true value of the item due to overestimation. Given the private values and the range provided, a bid of $288,000 by Individual 1 is a strategic choice that balances the desire to win the auction with the risk of overpaying. This bid is below Individual 1's private value of $298,000, indicating a cautious approach to avoid the winner's curse while still remaining competitive in the bidding process.

Three Individuals Are Bidding for a House