Economics
Two-Bidder Auction
You hold an auction on eBay and expect two bidders to show up. You estimate that each bidder has a value of either $5 or $8 for the item, and you attach probabilities to each value of 50%. Your own value for the item is zero. You can set a reserve price, a price below which you will not accept bids for the item. What reserve price should you set, and what is your expected revenue from auctioning the item with a reserve price?
Three-Bidder Auction
You now expect three bidders to show up. What reserve price should you set, and what is your expected revenue from auctioning the item with a reserve price?