Consider the following simple game between you and your good friends Julia and Scott. You are playing with a deck of playing cards that is in all respects normal except that there are no face cards (jack, queen, king), so there are 40 cards ranging from 1 to 10. Scott thoroughly shuffles the deck. There are two versions to this game, and you will play each one the differences between the two versions of the game are highlighted in italics.
Version A: Scott pulls out a card, face down. None of you see the card. You and Julia then have the opportunity to bid between Si and S10. You can bid more than once, but each bid must be higher than the previous. The highest bidder pays the amount of the bid to Scott. Scott reveals the card, and he pays the winning bidder an amount equal to the value of the card. In this game, what is your optimal strategy? Why?
Version B: Scott pulls out a card and looks at it, then places it face down. Without having seen the card, you and Julia have the opportunity to bid between $1 and $10. You can bid more than once, but each bid must be higher than the previous. During the bidding process, Scott is able to provide information about the card, as long as he does not lie. The highest bidder pays the amount of the bid to Scott. Scott reveals the card, and he pays the winning bidder an amount equal to the value of the card. In this game, what is your optimal strategy? Why? What type of information asymmetry does this game illustrate?