Consider an antique auction where bidders have independent private values.There are two bidders,each of whom perceives that valuations are uniformly distributed between $100 and $1,000.One of the bidders is Sue,who knows her own valuation is $200.What is Sue's optimal bidding strategy in a second-price,sealed-bid auction?

Question

Quizplus · Accepted Answer

In a second-price sealed-bid auction, the bidder with the highest valuation wins the auction but pays the second-highest bid. So, Sue's goal is to bid the maximum amount she is willing to pay (her valuation of $200) but not more than that.

If Sue bids less than $200, she risks losing the auction to the other bidder, who may have a higher valuation. If Sue bids more than $200, she risks overpaying for the item because she will only pay the second-highest bid, which may be lower than her own bid.

Therefore, Sue's optimal strategy is to submit a bid of $200, which is equal to her own valuation.

Consider an Antique Auction Where Bidders Have Independent Private Values