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Game Theory and the Design of Auctions

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How can the concepts of game theory be applied to buying through ecommerce or a retail store? Can you show me an illustration.

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Game Theory can impact the strategies involved in determining the starting price for the sellers and retailers and bidding strategies for the buyers. (e.g. in the e-commerce like eBay, ubid). A buyer participating in an auction (online or traditional) tries to guess the bids of the others and bid a tiny amount higher in order to win, provided in doing so it does not exceed the value of the object being sold. The other participants are in turn faced with the same choice and are also trying to guess what this buyer is thinking of doing. A key feature of auctions is that buyers do not know how much the others value the object being sold. For this reason, an aggressive buyer that bids high runs the risk of getting the object at a much higher price than necessary, and a cautious buyer that 'shades' its bid could lose an object that would have been valuable/profitable even at the final price at which it was sold to someone else. The buyer needs to determine whether it should bid an amount equal to its true value or whether it should bid lower. The answer of this question depends on the nature of the object that is being sold and the auction mechanism that is being used.

There are two diametrically opposite auction models. In the private value model the value of the object for each buyer is different, each buyer knows exactly how much the object is worth to her, but that information is ...

Solution Summary

Game theory and the design of auctions are focal points.

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Game Theory Question and Business Examples

1. Two major wireless phone companies are going to offer 4G services in the country of Uruguay. Because of county regulations each company can only offer a single plan. The companies can only offer one of three possible plans. One of the companies (South Wireless) contracted a market study to estimate the potential number of customers under each circumstance. The table below shows the results of the marketing study:

Competitor
Plan A Plan B Plan C
South Wireless Plan A 1.5, 1.5 1.6, 1.4 2.6, 0.4
Plan B 1.8, 1.6 2.0, 1.0 2.2, 0.8
Plan C 1.2, 1.8 2.2, 0.8 2.4, 0.6

Potential Customers in Millions

Using your knowledge in game theory, which would be the best plan choice for South Wireless? Explain.

2. In two hundred words, describe two applications or cases of game theory in business.

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