Suppose Firm 1, Firm 2, and Firm 3 are the only three firms interested in a lot

Question

Suppose Firm 1, Firm 2, and Firm 3 are the only three firms interested in a lot at the corner of First Street and Glendon Way. The lot is being auctioned by a second-price sealed-bid auction. Suppose Firm 1's value of the lot is $10,000, Firm 2's value is $17,000, and Firm 3's is $10,500. Each bidder's consumer surplus is CS = V_i-p If it wins the auction and 0 if it loses. The values are private. What is each bidder's optimal bid? Who wins the auction and what price does that firm pay? Firm 1's optimal bid is $ . Firm 2' s optimal bid is $ , and Firm 3's is $ .(Enter your responses as whole numbers) The auction winner will be , who will pay $ .

Explanation / Answer

Hi In Second Price Sealed Bid Auctions, the object is sold to the HIGHEST bidder at the SECOND HIGHEST Bid price. In this type of auction, it is always better to bid at the bidder's own valuation of the object as it will ensure that there are no negative returns. Thus, for the lot, Firm 1's Optimal Bid would be it's valuation of the lot, i.e., $10,000 Firm 2's Optimal Bid would be it's valuation of the lot, i.e., $17,000 Firm 3's Optimal Bid would be it's valuation of the lot, i.e., $10,500 The highest bidder in this case is Firm 2 with a bid of $17,000 while the second highest price is bid by Firm 3 at $10,500 Thus, the lot will be sold to Firm 2 (HIGHEST BIDDER) at $10,500 (SECOND HIGHEST PRICE) The consumer surplus earned by Firm 2 will be $6,500 ($17,000-$10,500) Hope it clears your doubts! :-)

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