MUNHUMUTAPA SCHOOL OF COMMERCE

Master of Business Administration

NAME: MAORERA NYARADZAI M142278

PART: 1.2
QUESTION 1(a)

The following are the examples of typical economic decisions made by managers of a
firm. Determine whether each is an example of what, how or for whom to produce:

A firm must allocate its resources and choose from different potential bundles of goods or
services (What to produce), select from different techniques of production (How to produce),
and decide in the end, who will consume the goods (For whom to produce).

i. Should the company replace telephone operators with computerized

voicemessaging?

The above statement is an example of what to produce economic in the sense that the
management is choosing between to possible options to produce which are telephone
operators or computerized voice messaging.

ii. Should the company continue to service the equipment it sells or ask the
customers to use independent repair companies?

The statement above is an instance of a what to produce economic statement in the sense
that, either the company produces their equipment with an additional package to service them
or just product equipment without the additional package to service them, but rather other
repair companies can service them.

iii. Should the company make its own spare parts or buy them from an outside
vendor?

The statement above is an example of a how to produce economic statement in the sense
that, the managers are deciding on whether to buy or produce which is tantamount to the
problem of how to produce in economics.

iv. Should the company buy or lease the fleet of trucks that it uses to transport its
products to markets?

The statement above is an example of a how to produce economic statement in the sense
that, the managers ae deciding on whether to buy or produce which is the same as the
problem of how to produce in economics
v. Should the company expand its business to international markets or concentrate
on domestic markets?

The statement above is an example of a for whom to produce economic statement in the
sense that, the managers are deciding on the kind of market they want to produce for, and this
is a problem that is answered under the question for who to produce in economics.

QUESTION 1(b)

i. Using hypothetical examples, explain fully the English auction and the Dutch
auction.[8 marks]

English Auction

English auction refers to the process or method of the sale of a single quantity of a product
where the bidding starts with the starting price which is set by the seller of the product and
increases with the continuous bidding from the different buyers until the price is reached at a
level above which there is no further bidding, and this price will be the selling price of the
product under the auction.Under this method, all the bidders are aware of each other, and the
bids are placed openly in front of everyone. The process starts with the declaration of the
opening bid or the reserve price, which the seller of the product sets. After this, the interested
bidders start placing their respective bids in an ascending order, i.e., the next bid should be
higher than the previous bidder’s price. This process continues until there is a bid above
which any other buyer is not interested in buying the item. This is the highest bid and the
selling price of the product.

For example, Mr. Tawanda defaulted on the loan taken from the bank and the bank decided to
sell off the house attached to the loan, to recover the loan through the bidding process. The
bank arranged the auction and advertised about the auction so that many bidders can come
and bid. The bank’s reserve price was $ 250,000, which was the current market value of the
house prevailing at the time of auction.The bidding process started by the host of the bid
program declared the initial set price as $ 250,000 to all the bidders at the time of auction and
asked them to bid further. One of the bidders placed the bid at $ 265,000, and further bid
increased to $ 275,000 and then to $ 300,000. After which no further bid was received. So,
the house was sold to the person who bided for $ 300,000, and with this, the host announced
the completion of the auction.
Dutch Auction

 Dutch auction is a market structure in which the price of something offered is determined
after taking in all bids to arrive at the highest price at which the total offering can be sold. In
this type of auction, investors place a bid for the amount they are willing to buy in terms of
quantity and price.A Dutch auction also refers to a type of auction in which the price of an
item is lowered until it gets a bid. The first bid made is the winning bid and results in a sale,
assuming that the price is above the reserve price. This contrasts with typical auction markets,
where the price starts low and then rise as bidders compete among one another to be the
successful buyer.

For instance, the Municipality of Masvingo is selling a piece of land in Masvingo CBD and
advertises it in the news paper through the tender system. Various buyers put down their
prices and payment terms on paper and put into envelopes that will only be opened at the due
date of the tender. The auction administrator opens the submitted bids from all the buyers and
reads out loud the bid prices in front of everyone and the highest bidder wins.

ii. Show the differences between private value and common value of an auction.

Auctions have traditionally been divided into two categories. An auction is a mechanism for
trading items by means of bidding. In private value auctions, bidders know their own value
for the commodity with certainty but are unsure about others’ valuations. Vickrey (1961)
provides an early strategic analysis of private value auctions for the case when values are
independent across bidders. The standard textbook example associated with his model is the
selling of a painting; buyers’ valuations for the painting may differ but are assumed to be
independent.

In contrast, common value auctions pertain to situations in which the object for sale is worth
the same to everyone, but bidders have different private information about its true value. A
well-known example where the common value setup applies is the auctioning of oil drilling
rights, which, to a first approximation, are worth the same to all competing bidders. Common
value models were introduced by Wilson (1969) who also provided the first equilibrium
analysis of the winner’s curse.

In a nutshell, common-value auctions have the actual value same for everyone, but bidders
have different private information ("signals") about what that value is. In this case a bidder
would change her estimate of the value if she learned another bidder's signal.
In contrast, in private-values model, each bidder knows how much he values the object for
sale, but his value is private information. In contrast to the common-value setting, a bidder's
value would be unaffected by learning any other bidder's information

iii. Demonstrate the various bidding strategies in private-value auctions.

In first price sealed auctions, the English auction one stay in the auction until either you win
or the bid goes higher than your value. If not one either makes one lose when it is worthwhile
to win or win when it is worthwhile to lose. The key to understanding this is to understand
that staying in does not affect the price one pays if they win only whether one wins (it does
affect others’ prices). In a first-price sealed-bid auction, each bidder submits a sealed bid to
the seller (that is hidden from other bidders). The high bidder wins and pays his bid for the
good. Generally, a sealed-bid format has two distinct parts--a bidding period in which
participants submit their bids, and a resolution phase in which the bids are opened and the
winner determined. In a first-price sealed-bid auction, a bidder always bids below her
valuation for the item. If she bids at or above her value, then her payment equals or exceeds
her value if she wins the auction, and therefore her expected profit will be zero or negative. In
a first-price sealed-bid auction, there is no sequential interaction among bidders. Bidders
submit the bids only once.

Second price similar logic to English auction is optimal to bid one’s value. It means that
one’s bid does not affect the price one pays only whether or not one pays. Raising one’s bid
will cause one to win when it is not worthwhile and lowering one’s bid will cause one to lose
when it was worthwhile to win. In second-price sealed-bid auction, a bidder who offers the
highest price gets a good in the second highest price. This style of auction has the incentive
compatibility. The dominant strategy for each bidder is to place a bid honestly her/his own
true value So it works the competition principle as well as English auction and a winning bid
reflects a market price better than a first-price sealed-bid auction.

iv. How does the winner’s curse arise in common value auctions?

A bidder’s curse is when the bidder bids for an item aggressively and ends up overcharging
themselves due to uncertainty in the valuation of the bided item. Uncertainty exists in first-
price sealed bid auctions with common item values for many reasons, including:

1. Bidders have access to different information,

2. Bidders interpret the same information differently, and
 3. Valuation of items is a complicated and subjective process.

It is because of the above reasons that the winner’s curse arises and the bidder overbids. The
winner's curse is a phenomenon that may occur in common value auctions, where all bidders
have the same (ex post) value for an item but receive different private (ex ante) signals about
this value and wherein the winner is the bidder with the most optimistic evaluation of the
asset and therefore will tend to overestimate and overpay.
REFERENCES

Holt, Charles A. (1980) "Competitive Bidding for Contracts Under Alternative Auction
Procedures," Journal of Political Economy, 88, 433-445.

Klemperer, Paul D. (1998) "Auctions With Almost Common Values," European Economic
Review, 42, 757-769.

Klemperer, Paul D. (1999) "Auction Theory: A Guide to the Literature," Journal of Economic
Surveys, 13(3), 227-286.

Vickrey, William (1961) "Counterspeculation, Auctions, and Sealed Tenders," Journal of

Finance, 16, 8-37.