What is the optimal bid for a descending-price auction if the bidder's reservation price is 8,the lowest possible bid is 3,and there are five bidders?
A) 3.
B) 6.
C) 7.
D) 8.
E) None of the above.

Question

Quizplus · Accepted Answer

In a descending-price auction, the highest bidder wins but pays the lowest winning bid. Since the bidder's reservation price is 8, and the lowest possible bid is 3, the bidder would want to bid higher than the reservation price but not too high to avoid overpaying. With five bidders, the winning bid is likely to be closer to the lowest bid, so bidding just above the reservation price is a good strategy. Therefore, the optimal bid is 7, which is just above the reservation price of 8 but still close to the lowest possible bid of 3.

What Is the Optimal Bid for a Descending-Price Auction If