Computing the optimal price from an auction with uniform distributed values

auction-theoryeconomicsprobabilitystatisticsuniform distribution

If I sell an item with value uniformly distributed between $0$ and $500$, and I value this item at $200$, then what is the ideal price to try to sell the item for? Note that once I set a price, I cannot change it . And there is only one potential buyer.

The two ideas that I have are that the ideal offer should be one of two possibilities.

  1. As it is uniformly distributed between $0$ and $500$, this implies that the expected offer ought to be $250$.

  2. As I value the item at $200$, this implies that I will not sell the item for less than $200$, and perhaps it would be better to model the value as being uniformly distributed between $200$ and $500$. This would give the expected value $350$ (which I believe could also be the optimal offer).

I was wondering if I either of these approaches are correct, and if not, what is the best way to tackle this type of problem. I am particularly interested in the reasoning behind why the ($1$), ($2$), or both are incorrect (clearly at least one is incorrect as they conflict with each other) – not just why the correct answer is indeed correct.

Best Answer

If I offer the item at price $x$ then the part of the population which will accept the offer is

$$\frac{500-x}{500}$$

so what I want to maximize is the expected value of such an offer is

$$\max_x \ \ (\frac{500-x}{500})x + \frac{x}{500}\cdot200$$

because $\frac{500-x}{500}$ of the times you sell the item to someone else at price $x$ and $ \frac{x}{500}$ you keep your item and the value of it is $200$.

The maximum is achieved at $350$ so your second interpretation is the correct one!