Re: Game Theory Problem
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Assume Company A wants to maximize profits, how much should they offer per share?
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I think the answer is 0.
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That is what I came up with too, but that seems like it would make it a kind of pointless question. Maybe it is though.
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This is a very famous problem. As I said above it's known as the winner's curse.
The problem is that in a common value auction (where you've bidding on the value of something to the public not to you personally, basically like you're buying stuff for business reasons) bidders often don't take into account that if they win the auction they must have estimated the value of the good to be higher than others thought. This leads to a "curse" because that probably means that the winner overbid and will lose money on the transaction. This often happens in actual auctions for oil fields and that kind of thing.
So the basic principle at work here is that you need to consider what your offer being accepted means. In this case it's only bad news for you.
The problem seems (and should be) easy for people here because we're accustomed to making EV decisions often and taking the greater picture into account. Just wait until class, you'll see that most people [censored] it up and would lose money.
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