ECON 440/640 Problem Set 3 Answers
Problem 3.3
When
b
i
=
b
L
,
π
i
(
p
i
)
is
π
i
(
p
i
) = (
a
−
p
i
−
b
L
E
[
p
j
])
p
i
so
dπ
i
dp
i
=
a
−
b
L
p
j
−
2
p
i
⇒
p
∗
i
=
p
∗
L
=
a
−
b
L
E
[
p
j
]2
.
Likewise when
b
i
=
b
H
,
p
∗
i
=
p
∗
H
=
a
−
b
H
E
[
p
j
]2
.
The expected price the other ﬁrm sets is
E
[
p
j
] =
E
[
p
] =
θp
∗
H
+ (1
−
θ
)
p
∗
L
so
E
[
p
] =
θ
a
−
b
L
E
[
p
]2
+ (1
−
θ
)
a
−
b
H
E
[
p
]2
E
[
p
] =
a
2
−
θb
L
−
(1
−
θ
)
b
H
.
It is possible to use
E
[
p
]
to solve for
p
∗
H
and
p
∗
L
, but as far as I can tell, doing so does notlead to anything interesting.
Problem 3.6
The problem asks you to show that in there are
n
bidders, then the strategy of bidding
b
i
=(
n
−
1)
v
i
/n
is a symmetric BNE. Given that everyone plays this strategy, the probabilityof
b
i
being the winning bid is
Pr(
b
i
>
max
{
b
j

j
=
i
}
) = Pr(
b
i
> b
1
)
∗
Pr(
b
i
> b
2
)
∗
...
= Pr(
b
i
>
(
n
−
1)
v
1
/n
)
∗
Pr(
b
i
>
(
n
−
1)
v
2
/n
)
∗
...
= Pr(
v
1
< nb
i
/
(
n
−
1))
∗
Pr(
v
2
< nb
i
/
(
n
−
1))
∗
...
=
nb
i
n
−
1
n
−
1
1