Past exam of the mathematics course of the University of Cambridge 2003 iii Paper 37 5 Solution Created 2026-10-03 Updated 2026-10-14
Let denote player 's expected payoff, so the definition also covers mixed strategies. If is a dominant strategy, thenfor every opponents' profile and every alternative . In particular this holds at . Thus no player can improve its payoff by a unilateral deviation from , which is exactly the definition of a Nash equilibrium. A profile of dominant strategies is a Nash equilibrium.
For the second-price sealed-bid auction, use the usual private-value auction assumptions: a bidder with value has quasilinear utility minus its payment if it wins, and zero if it loses. Fix the highest opposing bid . If , winning gives , and bidding wins. If , winning gives , and bidding loses. If , winning or losing gives zero, irrespective of the tie rule. Any other bid can only change whether the bidder wins, not the payment conditional on winning. It therefore cannot improve on the truthful bid in any of these cases. Hence bidding the true value is a weakly dominant strategy. Neither symmetry nor independence of the opposing values is needed for this argument.
For part (a), in a first-price sealed-bid auction with , continuous nonnegative bids and , no fixed bid is a dominant strategy. A positive bid can be improved against opponents all bidding zero: replace it by , still win, and increase the payoff by . Bid zero can be improved against an opposing highest bid : bidding wins and earns , whereas zero loses. This proves the no dominant positive-value bid in a first-price auction result.
Allowing mixed strategies does not change that conclusion. Against all-zero opponents, a random bid has expected payoff strictly below unless it is always zero and the tie rule awards this bidder the item with certainty. Any positive bid incurs a strictly positive payment, and any probability of losing at zero also reduces the payoff below . In the strict case choose a sufficiently small positive fixed bid so that exceeds the random bid's expected payoff. In the exceptional case the preceding deviation against still improves it. The assumptions matter: for value zero, bid zero is weakly dominant; with only one bidder it is also optimal. Consequently there is no dominant strategy for a positive-value bidder in the standard first-price setting.
Part (b)'s printed nonexistence request is false under the stated symmetric independent private values model. Lack of a dominant strategy does not imply lack of a Nash equilibrium. For incomplete private information the appropriate equilibrium is a Bayesian Nash equilibrium, a Nash equilibrium of the game whose strategies are bidding rules as functions of private values. Here is an explicit counterexample with a full deviation check.
Let the risk-neutral bidders have independent valuations with the uniform distribution on , and put . Suppose every opponent bids . A bidder with value who bids wins with probability , since the opposing values must all be below . Ties have probability zero, including at either endpoint. Its expected quasilinear utility isFor ,Thus increases up to and decreases thereafter. For , bid zero is optimal directly. A bid above wins with certainty and pays more than bidding , so it cannot improve on the maximum already found in . A randomized bid is a mixture of these payoffs and also cannot improve on their maximum. The best response for every value is therefore the proposed bidding rule itself. This proves the uniform private-value first-price bidding equilibrium:The value- expected equilibrium payoff is . The bidding rule is a pure strategy in the Bayesian game, even though values are random. Therefore the requested general nonexistence claim in (b) has a counterexample, rather than a valid proof. The defect is present in the original PDF, not introduced by the converted text.