Question

You are a bidder in an independent private values auction, and you value the object at $2,000. Each bidder perceives that valuations are uniformly distributed between $1,000 and $10,000. Determine your optimal bidding strategy in a first-price, sealed-bid auction when the total number of bidders (including you) is:

Answer 1

Answer and Explanation:

The computation of the optimal bidding strategy is shown below:

As we know that

= Bidder's own valuation - (Bidder's own valuation - Lowest valuation) ÷ number of bidders

a) Optimal bid = $2,000 - ($2,000 - $1,000) ÷ 2

= $1,500

b) Optimal bid = $2,000 - ($2,000 - $1,000) ÷ 10

= $1,900

c) Optimal bid = $2,000 - ($2,000 - $1,000) ÷ 100

= $1,990

We simply applied the above formulas to determine the optimal bidding strategy