Question

CPT Inc. is a local manufacturer of conveyor systems. Last year, CPT sold over $2 million worth of conveyor systems that netted the company $100,000 in profits. Raw materials and labor are CPT’s biggest expenses. Spending on structural steel alone amounted to over $500,000, or 25 percent of total sales. In an effort to reduce costs, CPT now uses an online procurement procedure that is best described as a first-price, sealed-bid auction. The bidders in these auctions utilize the steel for a wide variety of purposes, ranging from art to skyscrapers. This suggests that bidders value the steel independently, although it is perceived that bidder valuations are evenly distributed between $4,000 and $22,000.

You are the purchasing manager at CPT and are bidding on three tons of six-inch hot-rolled channel steel against 6 other bidders. Your company values the three tons of channel steel at $11,000. What is your optimal bid?

Instruction: Enter your response rounded to the nearest penny (two decimal places).

$___________

Answer 1

Here, CPT Inc. must opt for the first-price-sealed-bid auctions where all the bids submit their bid simultaneously, and the higher bidder will win the auction and pay his bid. Besides this, the first-price sealed-bid auction has an independent private valuation which must have the optimal bidding strategy.

The optimal bid can be estimated as follows:

b= v-(v-L/n),

Here,

v is the bidder's valuation which is $11,000.

n is the number of bidders which is 6+1=7.

L is the lowest valuation which is $4000.

Now, substitute these values in the optimal bid formula. That is,

b= 11000-(11000-4000/7)

b= 11000-(7000/7)

b= 11000-1000

b= 10000

Henceforth, the optimal bid by CPT Inc. concerning first-price sealed-bid auction with 7 bidders is $10000.