. If some auction participants for crude oil field leases have estimates that th

Question

. If some auction participants for crude oil field leases have estimates that the oil in the ground is worth $1.2 million, $1.3 million, or $1.5 million with certainty; and other auction participants have estimates that the same oil field lease is worth $1.1 million, $1.3 million, or $1.5 million with certainty; and a third group of auction participants have estimates the same oil field lease is worth $1.1 million, $1.2 million, or $1.3 million, and all three forecasts contain the true common value, what is that value? How would you as auctioneer-seller design an auction to reduce strategic underbidding and realize this true value?

Explanation / Answer

The true common value is $1.3 million, since this value is common to all the auctions made.

Since we have to reduce underbidding, first we need to realise the actual area of the oil field that contains the oil and an estimate of the amount of oil available in there. We can also announce that the available oil field area may be more than the estimated. If the field area contains other resources they can also be mentioned just to support the starting bidding amount. Now we can start bidding from the cost of oil as estimated by us.

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