Using Economic Theory to Guide Numerical Analysis: Solving for Equilibria in Models of Asymmetric First-Price Auctions
In models of first-price auctions, when bidders are ex ante heterogenous, deriving explicit equilibrium bid functions is typically impossible, so numerical methods (such as polynomial approximations) are often employed to find approximate solutions. Recent theoretical research concerning asymmetric auctions has determined conditions under which equilibrium bid functions must cross. When equilibrium bid functions are approximated by low-order polynomials, however, such polynomials may not be flexible enough to satisfy the qualitative predictions of the theory. Plotting the relative expected pay-offs of bidders is a quick, informative way to decide whether the approximate solutions are consistent with theory.
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