Buyer's Curse Auction: Introduction

The "takeover game" is a situation in which one person makes a bid to acquire an object (e.g. a business) owned by the other. The object's basic profitability is only known by the owner. The bidder is a better manager and has a higher value per unit of quality, so economic efficiency would increase with a sale. The bidder makes a single take-it-or-leave-it bid. If the bid is accepted, the owner earns the bid amount, and the bidder earns the value of the quality of the acquired object. If the bid is rejected, the bidder earns nothing, and the owner earns the (lower) value of the quality of the object.

There is a potential "buyer's curse" since low-quality units are more likely to be sold, and hence the bidder may end up paying too much, even though it is worth more to the bidder than to the current owner. The takeover game highlights issues of bidding strategy and asymmetric information. The default setup (suggested by Jim Leady of Notre Dame) inovlves a role reversal in the second treatment, so that students can see things from both perspectives.

Vecon Lab - July 24, 2024