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3econ440640ps3answers2011

3econ440640ps3answers2011

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Published by: Bharavi Kothapalli on May 05, 2013
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05/05/2013

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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
[
 p
 j
])
 p
i
so
i
dp
i
=
a
b
L
 p
 j
2
 p
i
 p
i
=
p
L
=
a
b
L
[
 p
 j
]2
.
Likewise when
b
i
=
b
,
 p
i
=
p
=
a
b
[
 p
 j
]2
.
The expected price the other firm sets is
[
 p
 j
] =
[
 p
] =
θp
+ (1
θ
)
 p
L
so
[
 p
] =
θ
a
b
L
[
 p
]2
+ (1
θ
)
a
b
[
 p
]2
[
 p
] =
a
2
θb
L
(1
θ
)
b
.
It is possible to use
[
 p
]
to solve for
p
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
 
The first step follows because for
b
i
to be the maximum bid, it must be greater than eachother bid.Using this result, we can rewrite
π
i
as
π
i
= Pr(
b
i
>
max
{
b
 j
|
 j
=
i
}
)(
v
i
b
i
)=
nb
i
n
1
n
1
(
v
i
b
i
)=
n
n
1
b
n
1
i
v
i
n
n
1
b
ni
(
n
1)
n
1
and use the first order condition to find
b
i
(
v
i
)
:
∂π
i
∂b
i
=(
n
1)
n
n
1
b
n
2
i
v
i
n
n
b
n
1
i
(
n
1)
n
1
= 0
so
(
n
1)
v
i
nb
i
= 0
b
i
(
v
i
) =(
n
1)
v
i
n.
Procurement Auctions
Each firm has expected profit
π
i
= Pr(
b
i
< b
 j
)(
b
i
c
i
)
.
If there is a linear bidding equilibrium where
b
 j
=
α
+
βc
 j
, then
Pr(
b
i
< b
 j
) = Pr(
b
i
< α
+
βc
 j
)= Pr(
c
 j
>
(
b
i
α
)
/β 
)= 1
Pr(
c
 j
<
(
b
i
α
)
/β 
)= 1
b
i
αβ 
=
β 
+
α
b
i
β .
Substituting this expression into the profit expression gives
π
i
=
β 
+
α
b
i
β 
(
b
i
c
i
)
.
2
 
Optimal bidding for
i
as a function of his type is given by the first order condition
i
db
i
= 0 =
β 
+
α
b
i
β 
b
i
c
i
β ,
so
β 
+
α
b
i
bi
+
c
i
= 0
b
i
=
β 
+
α
+
c
i
2
.b
i
also equals
α
+
βc
i
, giving us a second equation for the two unknowns
α
and
β 
. Clearly
β 
= 1
/
2
, so
α
+ 1
/
2 +
c
i
2=
α
+
c
i
2
α/
2 + 1
/
4 =
αα
= 1
/
2
.
We have worked out that the bidding strategy
b
A
= 0
.
5 + 0
.
5
c
A
is a best response to
b
B
= 0
.
5 + 0
.
5
c
B
and vice-versa, so these linear bidding strategies are a Bayesian Nashequilibrium.What is the cost to Harrysville?
[
c
] = min
{
c
A
, c
B
}
=
 
10
 
t
0
t
+
 
1
t
t dx dt
=
 
10
[
xt
]
t
=1
t
=
x
+
t
2
2
t
=
xt
=0
dx
=
 
10
x
x
2
2
dx
=
x
2
2
x
3
6
x
=1
x
=0
=13
and the expected winning bid is
[
b
] =12+1
/
32=23
.
3

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