Question

In: Economics

A seller of a good with a common value, but that value is highly uncertain will...

A seller of a good with a common value, but that value is highly uncertain will prefer to use

A. An English auction mechanism

B. A Dutch auction mechanism

C. A second-price auction

D. None of the above

Solutions

Expert Solution

Since the value of the good is highly uncertain, there is lack of consensus of knowledge about the good. Thus, the seller would want the buyer to pay the highest price possible.

If the seller adopts an english auction mechanism, then the bidders will bid against each other but since the value is highly uncertain, the bidders won't bid too high. Thus the seller will not get optimal value of the good.

In case of a Dutch auction, the bid starts at a higher price and goes in a descending order. This way the auctioneer will not let the price go beyond some hold price that he has set for the good. This is better than English auction when the value of the good is highly uncertain.

If the seller prefers a second-price auction, the seller receives the second highest bid from the bidders. Thus he is at a loss in this case.

Therefore, from all the choices present, the seller would opt option B i.e A Dutch auction mechanism.  

Rahul Sunny answered 1 year ago
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