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ECON 301 Chapter Notes - Chapter 18: Pareto Efficiency

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greenmosquito656
28 Mar 2017
School
Concordia University
Department
Economics
Course
ECON 301
Professor
Liva Aramaic Mallissa

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Document Summary

Markets are imperfect & it"s hard to figure out a consumer"s true valuation. Sealed bid first-price auction: bids are private and made simultaneously, highest wins. Sealed bid second price auction: bids are private and made simultaneously, highest wins, winner pays price of second-highest bid. Dutch: starts at high price, price lowers until a bidder accepts to pay it. Reserve price: minimum price - below it, the goods will not be sold. These valuations are independent (eg what"s worth 100$ to me might be worth 300$ to you) Item for sale has same value to every buyer. Potential buyers differ in their estimation of this common value. Pareto efficiency (item sold to buyer w/ highest valuation of the item) English must be efficient bc a buyer could pay a low price. English w/ reserve doesn"t need to be efficient bc there is a minimum sale price. Dutch doesn"t need to be efficient - buyers do not know other buyers" valuations.

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Related Questions

Suppose that three risk-neutral bidders are interested in purchasing a Princess Beanie Baby. The bidders (numbered 1 through 3) have valuations of $12, $14, and $16, respectively. The bidders will compete in auctions as described in parts (a) and (b); in each case, bids can be made in $1 increments at any value from $5 to $25.

(A) Which bidder wins an open-outcry English auction? What are the final price paid and the profit to the winning bidder?

(B) Which bidder wins a second-price sealed-bid auction? What are the final price paid and the profit to the winning bidder? Contrast your answer here with that for part (a). What is the cause of the difference in profits in these two cases?

Suppose that three risk-neutral bidders are interested in purchasing a Princess
Beanie Baby. The bidders (numbered 1 through 3) have valuations of
$12, $14, and $16, respectively. The bidders will compete in auctions as described
in parts (a) through (d); in each case, bids can be made in $1 increments
at any value from $5 to $25.
(a) Which bidder wins an open-outcry English auction? What are the final
price paid and the profit to the winning bidder?
(b) Which bidder wins a second-price sealed-bid auction?What are the final
price paid and the profit to the winning bidder? Contrast your answer
here with that for part (a). What is the cause of the difference in profits
in these two cases?
(c) In a sealed-bid first-price auction, all the bidders will bid a positive
amount (at least $1) less than their true valuations. What is the likely
outcome in this auction? Contrast your answer with those for parts (a)
and (b). Does the seller of the Princess Beanie Baby have any clear reason
to choose one of these auction mechanisms over the othed
(d) Risk-averse bidders would reduce the shading of their bids in part (c);
assume, for the purposes of this question, that they do not shade at all.
If that were true, what would be the winning price (and profit for the
bidder) in part (c)? Does the seller care about which type of auction she
chooses? Why?

Suppose that three risk-neutral bidders are interested in purchasing a Princess Beanie Baby. The bidders (numbered 1 through 3) have valuations of $12, $14, and $16, respectively. The bidders will compete in auctions as described in parts (a) and (b); in each case, bids can be made in $1 increments at any value from $5 to $25.

(A) Which bidder wins an open-outcry English auction? What are the final price paid and the profit to the winning bidder?

(B) Which bidder wins a second-price sealed-bid auction? What are the final price paid and the profit to the winning bidder? Contrast your answer here with that for part (a). What is the cause of the difference in profits in these two cases?

(C) In a sealed-bid first price auction, all the bidders will bid a positive amount (at least $1) less than their true valuations. What is the likely outcome in this auction? contrast your answer with those for part (A) and (B). Does the seller of the princess Beanie baby have any clear reason to choose one of these auction mechanisms over the other?

(D) Risk- averse bidders would reduce the shading of their bids in Part (C); assume, the purpose of this question, that they do not shade at all. If that were true, what would be the winning price (and profit for the bidder) in part (C)? Does the seller care about which type of auction she chooses? Why?