The “winner’s curse” refers to the following phenomenon: a. In a common value au
ID: 1120945 • Letter: T
Question
The “winner’s curse” refers to the following phenomenon:
a. In a common value auction---an auction in which bidders can only estimate their own value for an object, e.g., an oil lease auction---the winning bidder often makes a loss. This is because the bidders who did not win the auction are likely to retaliate with even higher bids in future auctions.
b. In a common value auction, the winning bidder often makes a loss. This is because he fails to take into account that, if he wins the auction, his estimate is likely the highest among all the bidders, and therefore probably too high.
c. In common value auctions, the auctioneer is likely to earn a low revenue, because the bidders are more likely to collude than in other auctions.
d. None of the above.
Explanation / Answer
Ans: b. In a common value auction, the winning bidder often makes a loss. This is because he fails to take into account that, if he wins the auction, his estimate is likely the highest among all the bidders, and therefore probably too high.
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