IBM Research | Ponder This | March 2008 solutions

# Ponder This

## March 2008

<<February March April>>

1. Suppose B's valuation of G is p then B should offer S p/2. For suppose B offers x, then S will accept whenever S's valuation is less than x which will happen a fraction x of the time. When S accepts B's gain is p-x so B's expected gain is x*(p-x). Elementary calculus shows this is maximized for x=p/2 as claimed.

B's expected gain is integral(0 to 1){p*p/4}=1/12=.0833+
S's expected gain is integral(0 to 1){(p*p/8}=1/24=.0416+

2. We claim B1 and B2 should offer 2*p/3 where p is the value they place on G. For suppose B1 adopts this strategy and B2 places value p on G. Suppose B2 offers x. Assume first x < 2/3.Then this will be the highest bid whenever B1's valuation is less than (3/2)*x and will be accepted whenever S's valuation is less than x. So B2's expected gain is x*(1.5*x)*(p-x). Again elementary calculus shows this is maximized for x=(2/3)*p. Assume next x > 2/3. Then this will always be the highest bid so B2's expected gain is x*(p-x). This is decreasing for x > 2/3 (since it is decreasing for x > p/2 and p/2 < 1/2). So there is no reason to bid more than 2/3. Therefore the optimal strategy is to bid 2*p/3. If either bidder adopts this strategy the other bidder does best to adopt it also.

B2's expected gain is integral(0 to 1){2*p*p*p/9} = 1/18 =.0555+. By symmetry so is B1's. When B2 successfully bids for G, S's expected gain is also integral (0 to 1){2*p*p*p/9} = 1/18 = .0555+. S's expected gain is the same when B1 wins for a total of 1/9 = .1111+.

So as expected a seller does better when there are multiple potential buyers.

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