Problem
Suppose you are bidding in a second-price auction for an ad spot on search page, and you suspect that the search engine is inflating the payments.
A. Suppose you think the search engine has placed a partner firm in the auction and told them to bid a fixed amount, i.e. $100. Is it still a dominant strategy for you to bid your valuation? Why or why not?
B. Suppose that you think the search engine is always going to charge the winner $1 less than the winner's bid, regardless of the actual second-highest bid. Is it still a dominant strategy for you to bid your valuation? Why or why not?
C. You should have gotten different answers to the previous two questions. What made the difference? Why doesn't the argument we saw in class establish that bidding your valuation is optimal in both cases?