Determine the buyers optimal acceptance strategy

Reference no: EM13239376

Consider a bilateral bargaining situation, in which both the seller's cost c and the buyer's valuation v are distributed uniformly on [0, 1].
The buyer and seller play a trading game, in which the rules are as follows. First, the buyer and seller simultaneously submit sealed bids. If the seller offers s and the buyer bids b then trade occurs if and only if b = s. Whenever trade does occur, the buyer's payment to the seller equals s.
(a) Determine the buyer's optimal acceptance strategy b(v).
(b) Determine the seller's optimal offer price s(c). Give an economic interpretation of this price.
(c) Compute the expected gains from trade in this mechanism. Express the inefficiency as a percentage of the maximal expected gains from trade.

Reference no: EM13239376

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