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Chapter 13: Q12E (page 501)

Question: An antique dealer regularly buys objects at hometownauctions whose bidders are limited to other dealers.Most of her successful bids turn out to be financiallyworthwhile because she is able to resell the antiquesfor a profit. On occasion, however, she travels to anearby town to bid in an auction that is open to thepublic. She often finds that on the rare occasions inwhich she does bid successfully, she is disappointed—the antique cannot be sold at a profit. Can you explainthe difference in her success between the two sets ofcircumstances?

Short Answer

Expert verified

The main difference between the two situations is the nature of the people participating in the auctions. As the dealers bid in the first auction, the highest bid is lower than the market price, thus, providing room for resale. However, in the public auction, the highest bid implies that other buyers are uninterested in buying the object by paying such a high price, thus, leaving no room for resale at a profit.

Step by step solution

01

Explaining the difference in the dealer’s success in the two situations

The main difference between the two situations is the nature of the people participating in the auctions.In any auction, the winner is the one who values the object the most. They are willing to pay the highest price for the object out of all the bidders.

When the antique dealer buys objects at hometown auctions, she is only bidding against other dealers. When she successfully obtains the object, she is the only seller of the object. She can, thus, resell it at a profit because the people are unaware of the true value of the antique and are unable to get it elsewhere.

Further, none of the dealers will bid a price for the product above the true value. Thus, even the highest bid will be lower than the product value so that the dealer can resell it at a profit.

When the antique dealer travels to a nearby town to bid in the auction with the public, she might be a victim of the winner’s curse and purchase the object at a price higher than the value. Also, in an auction with both dealers and buyers, if the dealer wins, it implies that none of the buyers can afford the high price of the object.

For example, if the dealer wins the public auction and buys an object for $1000, it implies that none of the buyers value the object at $1000. To obtain a profit, she must sell it at atleast $1001. However, as none of the buyers are willing to pay $1000, they will definitely not be willing to pay a greater price. Thus, she will not be able to resell it in that area.

However, if she chooses to sell the object in a town where the people do not have the facility to participate in such an auction, she can sell it for a profit as they will be unaware of the true price of the object.

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Most popular questions from this chapter

Two major networks are competing for viewer ratings in the 8:00–9:00 p.m. and 9:00–10:00 p.m. slots on a given weeknight. Each has two shows to fill these time periods and is juggling its lineup. Each can choose to put its “bigger” show first or to place it second in the 9:00–10:00 p.m. slot. The combination of decisions leads to the following “ratings points” results:

a. Find the Nash equilibria for this game, assuming that both networks make their decisions at the same time.

b. If each network is risk-averse and uses a maximin strategy, what will be the resulting equilibrium?

c. What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes first?

d. Suppose the network managers meet to coordinate schedules and Network 1 promises to schedule its big show first. Is this promise credible? What would be the likely outcome?

You play the following bargaining game. Player A moves first and makes Player B an offer for the division of \(100. (For example, Player A could suggest that she take \)60 and Player B take \(40.) Player B can accept or reject the offer. If he rejects it, the amount of money available drops to \)90, and he then makes an offer for the division of this amount. If Player A rejects this offer, the amount of money drops to $80and Player A makes an offer for its division. If Player B rejects this offer, the amount of money drops to 0. Both players are rational, fully informed, and want to maximize their payoffs. Which player will do best in this game?

You are in the market for a new house and have decided to bid for a house at auction. You believe that the value of the house is between \(125,000 and \)150,000, but you are uncertain as to where in the range it might be. You do know, however, that the seller has reserved the right to withdraw the house from the market if the winning bid is not satisfactory.

a. Should you bid in this auction? Why or why not?

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Two competing firms are each planning to introduce a new product. Each will decide whether to produce Product A, Product B, or Product C. They will make their choices at the same time. The resulting payoffs are shown below.

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a. Suppose you will play this game only once. If you and your competitor must announce your outputs at the same time, how much will you choose to produce? What do you expect your profit to be? Explain.

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c. Suppose instead that you are to play the first round of a series of 10 rounds (with the same competitor). In each round, you and your competitor announce your outputs at the same time. You want to maximize the sum of your profits over the 10 rounds. How much will you produce in the first round? How much do you expect to produce in the tenth round? In the ninth round? Explain briefly.

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