Consider a seller who must sell a single private value good. There are two potential buyers,...

Consider a seller who must sell a single private value good. There are two potential buyers, each with a valuation that is drawn independently and uniformly from the interval [0, 1]. The seller will offer the good using a second-price sealed-bid auction, but he can set a “reserve price” ofr ≥ 0 that modifies the rules of the auction as follows. If both bids are below r then neither bidder obtains the good and it is destroyed. If both bids are at or above r then the regular auction rules prevail. If only one bid is at or above r then that bidder obtains the good and pays r to the seller.

a. Show that choosing r = 0 is not optimal for the seller. What is the intuition for this fact?

b. What is the optimal reserve price for the seller?

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Expert Solution

Rahul Sunny answered 2 years ago

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