In one-round sealed-bid auctions, each prospective buyer

The main point is to highlight a token bid. What is a token bid. Token bids are bid where bidder feels there will be no other bid. This is the underlying assumption for token bids. Now bids for desired item having a reserve price is paradoxical in nature, what is the paradox here. That bidders feel since item is desirable there will be other bids, so they dont make a token bid. More number of bidders will make bids to outdo others for desirable item hence the paradox is it doesnt make economic sense. Token bids make economic sense and desirable item bids don't. Hence E

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Anyone else having problems with this question?
I still can't wrap my head around this....
Help someone?

The purpose of a reserve bid is to protect against a single bidder. Why would highly desirable items sometimes need this protection? Because bidders may think they can't afford to submit a winning bid so they refrain from bidding at all.

In one-round sealed-bid auctions, each prospective buyer submits in strict confidence a single bid, and the sale goes to the highest bidder. A reserve price - a minimum price below which there will be no sale - can be set by the seller as the protection against a token bid, which is an unreasonably low bid sometimes made by a bidder who gambles that there will be no other bid. Paradoxically, such protection is most needed when extremely desirable items are auctioned off this way.

Minimum price need to be set up for less desirable item because in that case it works as a protection for seller.
That kind of protection not needed for extremely desirable items because there are many bidders who will bid higher and higher and seller will always get more than minimum price. But still you need a minimum price. why?


Which of the following, if true about one-round sealed-bid auctions, most helps to explain why the generalization characterized above as paradoxical holds?

A. The bidder who submitted the winning bid on an item cannot, on being informed of this fact, decline acceptance of the item in favor of the next-highest bidder.
B. The identity of unsuccessful bidders is not disclosed unless those bidders themselves choose to disclose it.
C. The reserve price on an extremely desirable item is generally set high enough to yield a profit for the seller even if the winning bid just matches it.
D. Prospective buyers of an extremely desirable item can often guess quite accurately who at least some of the other prospective buyers are.
E. Prospective buyers tend to believe that, in order to be successful, a bid on an extremely desirable item would have to be so high as not to make economic sense.

With E, aren't we assuming that buyers will not bid at all. as they are thinking - "Oh!! it is so desirable that it would be very costly for me, it doesn't make any sense to bid at all." May be bidders go other way around, "Oh!! it is so desirable that I need to get it, I will get it."

Isn't this how rich people think and get all the absurd items in the world.


On other hand, C - The reserve price on an extremely desirable item is generally set high enough to yield a profit for the seller even if the winning bid just matches it.

Lets imagine a situation.
You have bones of Dinosaur.(First timer in the world) ANd you don't set minimum price for it even though you know that there will be a war among bidders to get it.
YOu think it's worth of 10000 million. but then you don't set MP for it.

Now situation at the bidders :
Ok, I don't know how does this thing cost. I will cost very high. I think 1000 million is enough. Now there are 5 buyers but all bid below that. lets say final bid is 9000 million but then you lost 1000 million from your projection.

But if you do that you take control of the entire situation. And you are maximizing the profit. Because now whatever it is, will be equal to or more of 10000 million.

In both cases (C&E), we are assuming something then what is the wrong with C and that is not with E.

"With E, aren't we assuming that buyers will not bid at all. as they are thinking - "Oh!! it is so desirable that it would be very costly for me, it doesn't make any sense to bid at all." May be bidders go other way around, "Oh!! it is so desirable that I need to get it, I will get it.""
Yes, we are assuming that, because that's implied in E. That it doesn't make economic sense to bid is strongly correlated with not bidding. Your second "bidder thought process" may or may not match reality, but it doesn't match the what is stated in E.

C could be true, but it doesn't resolve a paradox of why desirable items are likely to have only a single token bid.

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