Test Bank Appendix 15A
Appendix 15A—Auction Design and Information Economics
MULTIPLE CHOICE
1. Common value auctions with open bidding necessarily entail
a.
asymmetric information
b.
ascending prices
c.
more than two bidders
d.
amendment of bids
e.
sealed final offers.
2. An incentive-compatible mechanism for revealing true willingness to pay in a private value auction is
a.
impossible
b.
a Dutch auction
c.
a second-highest sealed bid auction
d.
a sequential auction with open bidding
e.
a discriminatory price all-or-nothing auction.
3. In comparing rules for serving a queue, last-come first-served has all of the following effects except
a.
reduces the waiting time
b.
causes few customers to arrive and depart more than once
c.
increases the side payments among those yet to be served
d.
hastens the adoption of a lottery system for deciding who should get the tickets
4. The principal advantage of an open bidding system for allocating telecommunications spectrum
licenses was
a.
the pooling of asymmetric information by the bidders
b.
the reconfiguring of cell phone license areas
c.
the substitute value of adjacent service areas
d.
reduced cost
5. A Dutch auction implies all of the following except
a.
more than one unit sale available
b.
higher prices later in the auction
c.
identical expected seller revenue for common value items
d.
greater expected seller revenue in estate sales with risk-averse bidders
6. Each partner in a simple profit-sharing contract that splits the independently verifiable sales revenue
minus unobservable cost has an incentive
a.
to reject an automatic renewal of the contract
b.
to understate fixed cost
c.
to overstate avoidable cost
d.
to understate customer loyalty for repeat purchases
e.
to renew the partnership contract
7. An optimal incentives contract can induce the revelation of true costs in a partnership by
a.
imposing penalties when costs are overstated
b.
offering bonus payments when costs are verified
c.
renewing the reliance relationship
d.
linking revealed cost to the partner’s foregone expected profits
e.
enlisting third-party enforcement
8. An incentive-compatible revelation mechanism is
a.
self-enforcing
b.
always multi-period
c.
too complicated to influence decisions
d.
prevalent in vertically integrated businesses
e.
not adopted by franchise businesses
9. Incentive-compatible revelation mechanisms attempt to
a.
induce an employee to reject the next best alternative employment opportunity
b.
elicit privately-held information
c.
secure enforcement primarily by third parties
d.
reject voluntary contracting with third parties
e.
impose similar risk premiums on all employees
10. Revenue equivalence theorem refers to equal seller revenue in which of the following pairs:
a.
sealed bid auctions and English auctions
b.
second highest wins and pays auctions and Dutch auctions
c.
English highest wins and pays auctions and sealed bid Dutch auctions
d.
highest wins and pays auctions and second highest wins and pay auctions
11. In Dutch auctions, the bidding
a. starts low and rises until the highest bidder wins.
b. is done in secret “sealed bids” which are opened at a specified time.
c. begins with a very high price, and is reduced until the first person takes it.
d. is accomplished by giving the price of the second highest bid to the highest bidder.
12. Winning an auction can be exhilarating, but it can also lead to doubt as to whether you did the right thing
or not. This is called:
a. The regret effect.
b. Moral hazard.
c. Second wind.
d. The winner’s curse.
13. Suppose that a private firm wants to go public to give the owners a chance to retire. It follows the lead of
the Google IPO by using a modified Vickrey (or uniform price) auction. The owners of the firm plans to
sell 1 million shares and hope to raise at least $10 million from the auction. The following bids were
submitted.
Bob 250,000 shares at $12
Sam 350,000 shares at $13
Mary 300,000 shares at $9
Sue 100,000 shares at $10
Ravi 450,000 shares at $11
a. The market clearing price is $13, and the sellers of the firm get $13 million.
b. The market clearing price is $12, and the sellers of the firm get $13 million.
c. The market clearing price is $11, and the sellers of the firm get $11 million.
d. The market clearing price is $10, and the sellers of the firm get $10 million.
e. The market clearing price is $9, and the sellers of the firm get$9 million
14. Auctions are used in place of markets when the items traded are unique (e.g., a Ming vase or a right to
drill for oil). Which of the following examples are typically sold using Vickrey auction methods?
a. For-sale-by-owner houses
b. Household furnishings
c. Items sold in Filene’s Basement, with the price discounted after a certain date
d. Vintage postage stamps
15. Sealed bids can be used in multiple rounds. How is this done?
a. The winner of the first round automatically wins all future rounds.
b. The winner’s price in the first round is the reservation price in the next round. If higher prices come
in the next round, the highest price is the new reservation price for round three, and so forth.
c. The second best price in the first round is the winner.
d. Bidding continues in more and more rounds until someone yells “uncle.”
16. Research suggests that an auction for a private value item will yield the HIGHEST payout if:
a. we use a Dutch auction
b. we use an English auction
c. we use only cash, and not allow credit cards
d. use a fixed price
Test Bank Appendix 15A
PROBLEMS
1. If two art dealers bidding for a Picasso receive the following forecast information about the chance of
a forgery which with previously unknown Picasso paintings is present 8 times in 10 historically, what
is the amount by which strategic underbidding could be reduced if ten bidders were attracted to the
auction?
Forecast Received:
Not a forgery, Actual Picasso is Forecast
Forecast Accuracy:
Prob(This Forecast/Actual Forgery) = 0.4
Prob(Forgery Forecast/Actual Forgery) = 0.6
Prob(This Forecast/Actual Picasso) = 0.9
Prob(Forgery Forecast/Actual Picasso) = 0.1
Exhibit 15A-1
Suppose GM and Nucor Steel seek to develop jointly a new sheet metal and auto body stamping
machine, and each party knows the payoffs in the following table of equi-probable outcomes but
cannot independently verify one another’s costs. Both GM and Nucor can cancel the project and both
will then earn $0 if the cost revelations give early warning of losses.
Nucor Steel
Low Costs
High Costs
($40)
($60)
Low Costs
($100)
$40
$20
GM
High Costs
($130)
$10
−$10
2. Refer to Exhibit 15A-1.
Part A: What is the incentive-compatible revelation mechanism that will induce true revelation of the
asymmetric cost information and maximize the value of the partnership?
3. Refer to Exhibit 15A-1.
Part B: What are the expected net profits to each partner under the incentives contract?
4. Refer to Exhibit 15A-1.
Part C: What is the expected net profit under the simple profit sharing contract, and why would the
partners adopt an incentive-compatible revelation mechanism (i.e., an optimal incentives contract)?
5. What are the expected net profits to Johnson & Johnson in a pharmaceutical R&D joint venture with
Amgen given the following joint profit payoffs. The joint profit payoffs are the difference between
$180 and the sum of the cost realizations. Assume that the three columns are equally likely to occur,
each row is equally likely to occur. Both Johnson and Johnson and Amgen can cancel the project and
both will then earn $0 if the cost revelations give early warning of losses.
JOINT PROFITS
Johnson and Johnson
Low Costs
Moderate Costs
High Costs
($30)
($50)
($60)
Low Costs
($100)
$50
$30
$20
Amgen
High Costs
($140)
$10
−$10
−$20
Low Costs
The figures in parentheses represent costs associated with the Low, Moderate and High cost
realizations, and all figures are in millions.