Suppose there are three bidders with values for the object that are independent, private and uniformly distributed over [0, 1]. a)
Continuous Probability Distributions
Probability distributions are of two types, which are continuous probability distributions and discrete probability distributions. A continuous probability distribution contains an infinite number of values. For example, if time is infinite: you could count from 0 to a trillion seconds, billion seconds, so on indefinitely. A discrete probability distribution consists of only a countable set of possible values.
Normal Distribution
Suppose we had to design a bathroom weighing scale, how would we decide what should be the range of the weighing machine? Would we take the highest recorded human weight in history and use that as the upper limit for our weighing scale? This may not be a great idea as the sensitivity of the scale would get reduced if the range is too large. At the same time, if we keep the upper limit too low, it may not be usable for a large percentage of the population!
Suppose there are three bidders with values for the object that are independent, private and uniformly distributed over [0, 1].
a) Derive the seller’s expected revenue in a second-price auction. Fully explain your
answer.
b) Derive the seller’s expected revenue in a first-price auction. Fully explain your
answer.
c) Explain why the answers to parts (a) and (b) are the same.
d) Show that the answers to parts (a) and (b) remain the same when there are N bidders. Fully explain your answer.
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