Maximizing the Revenue of a Digital Platform - A Sealed-Bid First-Price and Second-Price Auction Ana

Proposal for Selling the Digital Platform

Write an essay answering ALL questions in the Examination Booklet. Students must attempt all questions in the Examination Booklet.

You are asked to write an essay answering all the questions shown below. You are only required to submit you essay, however, you may include the procedure to find the solutions to the problems as an appendix in your essay. essay in the order specified, and in a clear and succinct way. You should write the number of the question you are answering at the start of the first paragraph of the section of your essay where you are answering a give question. For example, if you are answering question 1 and 2 then you should write your paragraphs in the following way:

Students who fail to follow the instructions given will lose marks. You should use the theoretical results and examples discussed in the lectures and seminars to complete your essay.

You are working for an economics consultancy firm. The Chief Economist of the company asked for a meeting where she presented a new contract involving Laura, a computer scientist, who wants to sell a digital platform she designed. The platform is very innovative, there is no information on how much the platform is valued as there is nothing similar in the market. The platform is expected to disrupt the market if it is used to compete in an already stablished market. At the end of the meeting you have been made leader of the team in charge of the project. You will present a proposal, in an essay format, to sell the platform obtaining the highest revenue possible for the seller, that is Laura. Laura recently won a funding competition that will cover all the fees charged by the consultancy firm, therefore, all the revenues from the auction will be for Laura.

In the proposal you should consider there is already an offer in place for 520. This offer was made by a firm with operations in a different market to the one relevant for the proposal. Your team has information about the profit maximising firms interested in acquiring the platform. The information indicates the firms can be considered risk neutral. Your team also gathered statistical information, the analysis of the data indicates the firms’ private valuations for the platform are independently and uniformly distributed between 0 and 1000. They also have information about the valuations of the 10 firms likely to participate in the selling process. These firms are competitors in the market, so it is safe to assume they all know the 10 are interested in the platform, although they don’t know other firms’ valuations. The data on the valuations are given in the table below

Sealed-Bid First-Price and Second-Price Auction Analysis

In the proposal (essay) you are asked to include the following two selling mechanisms, a sealed-bid first-price auction and a sealed-bid second-price auction. You have been asked to write your essay including the following information in the order presented. parenthesis you can find the maximum number of marks you can get for each answered item).

1. Explain why an auction is an appropriate selling mechanism in this setting. Explain what condition must be fulfilled for the seller to find the auction a better option relative to any other selling alternative available, indicate what feature should the auction design include for this condition to be met. (10 marks)

2. Introduce the sealed-bid second-price auction, explaining the format of the auction and what will be the optimal bidding strategy for the participants according to the theoretical results reviewed in the module, and the information presented in the problem. You should indicate what theoretical result you are basing your arguments on. Include information on who will win the auction, what will be the winner's bid, and how much will the winner pay. (15 marks)

3. Now, continue your essay introducing the sealed-bid first-price auction, explaining the format of the auction and what will be the optimal bidding strategy for the participants according to the theoretical results reviewed. You should indicate what theoretical result you base your argument on. Include information on who will win the auction, what will be the winner's bid, and how much will the winner pay. (15 marks)

4. Explain why the winner of the auction would find purchasing the platform profitable, and why the seller would (or would not) have incentives to sell the platform using an auction. (10 marks)

5. Advise which auction, the sealed-bid first-price auction or the sealed-bid second-price auction, is a better alternative for the seller in terms of revenues. (10 marks)

Your team has found that if the seller invests in marketing the auction can attract 10 more participants, rising the total number of participants to 20. The data on valuations for the original 10 participants (the same presented above) and the data on valuations of the 10 new participants that could be attracted to the auction are presented in the table below. Determine what will be the maximum amount the seller will be willing to spend on marketing to attract those 10 new participants to the auction. Be rigorous and clear when presenting your arguments, and present the theoretical results carefully.

1. Advise again which auction, the sealed-bid first-price auction or the sealed-bid second-price auction, is a better alternative for the seller in terms of revenues with 20 participants. Clearly explain why you advise to use the same auction as before or why you changed your advice. If you changed your advice, explain clearly what is the mechanism behind this change.

Laura, the computer scientist that designed the platform is very happy with the auction outcome. She invested part of the revenues obtained in the auction to start a new firm with former business partners Sheena and Grace. The start-up has received its first contract and they generated 1400 in profit. They are now struggling to find a fair way to split the 1400 profit between the thee of them and Laura has asked the consultancy firm for advice. Laura provided the following information: in similar projects, Laura produced a profit of 420, Sheena 260, and Grace 140. In previous collaborations Laura and Sheena created a profit of 680, Laura and Grace 600, and Sheena and Grace were able to make 420 together. The table below summarises the profits (v(S)) for each joint collaboration (S). In the table, L stands for Laura, S for Sheena, and G for Grace. As Chief Economist you have been asked to provide advice including information on what minimum conditions should be met for Laura, Sheena and Grace to find the splitting scheme rational, explaining the conditions clearly, providing amounts, and reasons why these minimum conditions should be met. Additionally, you have been asked to explain why splitting the 1400 using the Shapley value is a solution that should be considered, and indicate how the 1400 should be distributed according to the Shapley value. Finally, explain why using the Shapley value to split the 1400 profit will proof to be satisfactory to Laura, Sheena and Grace, helping to create a stable business relationship.