1. Project 2-Guidelines

2. Recall- Class Project-Goals Determine what would be expected to happen if each company bid the same amount as its signal. Determine the Company 1 bid under several uniform bidding strategies, and explore the expected values of these plans. Find a stable uniform bidding strategy that could be followed by all companies, without any chance for improvement.

3. Recall-Project Assumptions Assumption1. The same 18 companies will each bid on future similar leases only bidders for the tracts. Assumption2. The geologists employed by companies equally expert on average, they can estimate the correct values of leases. each signal for the value of an undeveloped tract is an observation of a continuous random variable, Sv,

4. Recall-Project Assumptions Assumption3. Except for their means, the distributions of the Sv’s are all identical (The shape /The Spread) Assumption4. All of the companies have the same profit margins

5. Strategies for bidding on an Oil Lease • Strategy 1 -Bid your signal. What will happen? Give reasoning for your analysis • Strategy 2(First Plan) -Subtract Winner’s curse from your signal to obtain bid. Assume all other companies do the same process. What will happen? Give reasoning for your analysis • Strategy 3(Second Plan) -Subtract Winner’s curse and Winner’s blessing from your signal to obtain bid. Assume all other companies do the same process. What will happen? Give reasoning for your analysis

6. Strategies for bidding on an Oil Lease • Strategy 4 -Find a optimal adjustment for company 1. Assume all other companies Subtract Winner’s curse and Winner’s blessing from their signals to obtain their bids. • Strategy 5 -Find a optimal adjustment for company 1. Assume all other companies Subtract Winner’s curse from their signals to obtain their bids. • Strategy 6 -Determine a stable Nash equilibrium bid. This stable strategy is such that any company will not have any incentive to deviate from

7. Strategy 6 How? (a) Use Auction Equilibrium.xls. (b) FOLLOW THE INSTRUCTIONS IN THIS FILE! (c) Enter appropriate values in cells B10 through E10. • Enter a logical value in cell E39. Run the macro Optimize. (the first logical value to use- (2wc+wb)/2 (e) Enter another logical value in cell E39 and press the key F9. Continue doing this until the values in cell D39 and E39 match to 2 decimal places. Keep a log of these numbers in chart form. When they match, this number is a stable adjustment. (f) Go through steps (d) and (e) again to obtain a second stable adjustment. (g)Go through steps (d) and (e) again to obtain a third stable adjustment. Continue this process 10 times and record values(use 4 decimal places) (h)Average these adjustments(for company 1) to obtain the best stable adjustment. Calculate your optimal bid for this strategy. Analyze this strategy giving logical support for your reasoning.