Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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A4
The Suboptimality of Lower-Than-Cost Reserve Prices: A seller chooses to sell an object by means of a Vickrey auction. If trade occurs, the seller incurs a positive opportunity cost (i.e. c > 0). There are n > 1 bidders participating in the auction. Suppose that the all of the bidders play according to a symmetric and increasing BNE strategy. Show that the seller is always better off by setting the reserve price equal to her cost (i.e. r = c) than by setting the reserve price below her cost (i.e. r < c).
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