Question

(Ebayís Recommendation): It is hard to imagine that anyone is not familiar with eBay, the most popular auction website by far. In a typical eBay auction, a good is placed for sale, and each bidder places a ìproxy bidî, which eBay keeps in memory. If you enter a proxy bid that is lower than the current highest bid, then your bid is ignored. If, however, it is higher, then the current bid increases up to 1 cent above the second highest proxy bid. For example, imaigne that three people have placed bids on a used laptop of $55, $98, and $112. The current price will be $98.01, and if the auction ended, the player who bid $112 would win at a price of $98.01. If you were to place a bid of $103.45 then the player who bid $112 would still win, but at a price of $103.46, while if your bid was $123.12 then you would win at a price of $112.01. Now consider eBayís historical recommendation that you thin hard about the value you impute to the good and enter your true value as your bid ñno more, no less. Assume that the value of the good for each potential bidder is independent of how much the other bidders value it.

(a) Argue that bidding more than your valuation is weakly dominated by actually bidding your valuation.

(b) Argue that bidding less than your valuation is weakly dominated by actually bidding your valuation.

(c) Use your analysis to make sense of eBayís recommendation. Would you follow it?

Answer 1

Solution A

Keeping a bid too high above the valuation of product is weakly dominated because higher thr bid by one buyer will cause other buyer to bid more in search of winning the bid. In this case the person with highest bid gets the productaat second highest bid price plus the spread cost. This results in higher cost of product than its valuation making it less attractive .

Solution B

If the buyer bids well below the product value in order to save money and get it at least cost, his bid may get ujdermined and ignored because he is unaware if the competitive bid. Hence this strategy too becomes ineffective

Solution C

EBay auction policy is seller biased and needs tweak into policies. The auction policy should have threshold rates beyond which buyers cannot bid so that rates are competitive. The threshold bid should not be revealed untill buyer reaches the point of threshold . The highest bidder who first crosses the threshold now shall havr maximum probability of winning the product on basis of sealed bid auction strategy where the highest number in sealed bid wins the product.