A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p-s and the buyer's payoff is b-p. Suppose simultaneously the buyer makes an offer p1 and the seller makes an offer p2. A transaction occurs if p1>=p2, and the transaction price is 1/2 (p1 + p2). Suppose the buyer uses a strategy p1(b) = 1/12 + (2/3)b and the seller uses a strategy p2(s) = 1/4 + (2/3)s. Suppose the buyer's value is 3/4 and the seller's valuation is 1/4. Will there be a transaction? Explain. Is this strategy profile a Bayesian Nash equilibrium? Explain.
A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p-s and the buyer's payoff
is b-p.
Suppose simultaneously the buyer makes an offer p1 and the seller makes an offer p2. A transaction occurs if p1>=p2, and the transaction price is
1/2 (p1 + p2). Suppose the buyer uses a strategy p1(b) = 1/12 + (2/3)b and the seller uses a strategy p2(s) = 1/4 + (2/3)s. Suppose the buyer's value is 3/4 and the seller's valuation is 1/4. Will there be a transaction? Explain. Is this strategy profile a Bayesian Nash equilibrium? Explain.
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