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A game theorist fills a jar with pennies and auctions it off on the first day...

A game theorist fills a jar with pennies and auctions it off on the first day of class using an English auction. Is this a private-value or common-value auction? Do you think the winning bidder usually makes a profit?

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Answer #1

It shall be noted that when a game theorist fills a jar with pennies and auction it off on the first day of class using an English auction, it is a common-value auction.

It is not the private-value auction because, in this auction, bidder knows only its own value for the auctioned good.

A jar filled with pennies has the same value for each of the bidders. However, each bidder have different estimate of that value.

The bidder with the highest estimate of the value over & above the true common value would get the jar filled with the pennies.

That means the one who is winning the auction is paying more than the true common value of the auctioned goods.

This is called the winner's curse. One who wins an auction wins because he or she has overestimated the value of the good being auctioned.

Thus, it can be concluded that the winning bidder does not usually make a profit.

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