01 May Question: (Ebayís Recommendation): It is hard to imagine that anyone is not familiar with eBay, the most po…
(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?
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