PTA.S1.Q25 - in one-round sealed-bid auctions

charlotte_tortie

Could someone help me shed some light on why the correct answer is correct? The passage refers to "such protection", as protection for the sellers (to not have to sell to a buyer who bids extremely low), but the correct answer (E), doesn't seem to be related to that at all. A bit confused.

BinghamtonDave

The first thing I noticed about this question is the convoluted question stem. My first thoughts were that apparently this was going to fall under the umbrella of the Resolve/Reconcile/Explain question type, meaning that there was going to be some perceived tension within the stimulus that by introducing an answer choice, that tension is lessened.

The next thing I noticed about this question is that it is extremely difficult. I believe it is difficult because of the volume of information presented and the precision required to actually locate the tension within the stimulus. Here is a breakdown of this problem:

-The first sentence tells us about a type of auction, a different type than the one many of us might have been to or watched on TV, a type different than the word "auction" conjures up in my mind at least. This type of auction is different because the auction described seems to lack a critical privilege of what a normal auction affords to participants: the ability to gauge what others are willing to pay for an item in the open so as to adjust one's bids accordingly. So for instance if I went to an auction with my wife and her and I made a pledge that we would not leave that auction without a new lawn mower because we were tired of borrowing the neighbor's, we might be more inclined to aggressively bid for a lawn mower because we need one. Under the auction described by the first sentence, no one knows that we are willing to pay really well for a lawn mower because they don't know our bid, this puts my wife and I into a weird situation, we essentially have to guess if anyone could want a lawn mower more than us and then adjust our bid accordingly. There is an awful lot packed into that first sentence.

The next sentence gives us two terms: first it tells us that the seller of the lawn mower can set a reserve price: the seller is essentially saying, no one will get this lawn mower for under $15. Why does the seller have this right in this stimulus? As a protection against a token bid this is a variation on the old "Price is Right" trick of guessing $1 because one believes that all other participants' bids will be disqualified for being over. In our stimulus, the seller is allowed to set a reserve price, just in case everyone who showed up for the lawn mower at the auction and no one showed up for the toolkit and someone decides that they will bid $1 on the toolkit and possibly win it because no one else bid. I think this is where we have to pause for a minute, given this information, I think it would be fair to say that the reserve price would most reasonably apply to the items no one wants, right?

That is where the tension comes in with this problem. Instead, given all the facts as they are laid out, it is actually the extremely desirable items at the auction that benefit from the seller receiving a reserve price.

That is odd. So why is it that the item everyone at this specific type of auction wants is the one that is most of the time something that falls under the seller's protection? One would think that there should be no problem getting all the bids to reach the worth of a desirable item. But what if there is something about a desirable item that frightens bidders in the context of this specific type of auction? Frightens them to such an extent that the sheer desirability prevents them from bidding.

This is what (E) says, with a bit of mid 90s assumption-making I'm not convinced would appear on a modern exam. (E) says that the items that are desirable actually tend to make people believe that they would have to make bids that "don't make economic sense." I take this to mean that they wouldn't make a bid and in that vacuum, someone not included in the "tends to" portion would come in and make a "token bid."

I hope this helps
-David