Suppose that two bidders know that the net present value of the rights to transmit PCS services in Louisville is a random variable uniformly distributed from $10 million to $60 million with six discrete values possible: $10 million, $20 million, $30 million, $40 million, $50 million, and $60 million. Also assume that both parties value the asset identically, making it a common-value auction. In advance, each company conducts marketing research experiments to narrow the possible outcomes and thereby better inform its own bid. Suppose Wireless Co.’s marketing research results exclude the two tails of the uniform distribution of possible values (i.e., $10 million and $60 million) as well as $40 million. Similarly, PCS PrimeCo conducts its own marketing research that excludes $10 million, $30 million, and $50 million as possible outcomes for the Louisville service area.
Questions
1.What should Wireless Co. bid in a single-round sealed-bid common-value auction? What should PCS PrimeCo bid in this same auction?
2.If Wireless goes first in a sequential posted-price auction with multiple rounds to follow, what should PCS PrimeCo respond in Round 2? In Round 3, will Wireless then wish to amend its earlier bid? Why or why not?
3.What auction design would be in the seller’s best interest: single-round sealed-bid or multiple-round open bidding?
4.Identify other factors that could affect the optimal auction design.