Question

The Rose Corporation is one of two sellers of paint. It pursues a tit-for tat strategy. However, it has great difficulty in telling whether its rival is secret cutting its price. What problems is this likely to cause.

Please explain at least two Concerns in Auction Design

Answer 1

• In a tit-for-tat strategy, if one player defects from the decided move then the other player copies him'her and plays the same move as the previous player in a way to punish the defected player.

In the given case, since the rose corporation seller does not whether the rival is cutting price or not, the rose corporation may face difficulties in case where he moves wrong. If the rival does not cut its prices and if the rose corporation reduces its own price, then it may be punished in the next stage of defaulting however, it may gain some profit by defaulting since its price is lowered and it may attract more customers.

Now, if the rival does cost cut and the rose corporation does not then it may face difficulty in this period as its price is higher compared to the rival resulting in loss of customers for rose corporation.

This all will result in the problem of no Nash equilibrium in the system which will result in inefficient market scenario.

•   Auction design uses economic theory and experience to improve the market conditions.

Two concerns in auction design are appropriate reservation price or bid for the product and information about the extent of competition. To set the appropriate bidding price in any market is important and through auction design this is taken care of. The extent of competition to be set in the market is equally important to decide on the market efficiency and the allotment of product between the market players.