Auctions
Shyam Sunder, Yale University
Kozminski Academy
Warsaw, June 22, 2013
Another Kind of Auction
• In the first meeting of the class we
conducted a double auction
• In this second class, we shall conduct
three different kinds of auctions
• After the auction, we shall analyze and
discuss the results
• Finally, we shall conduct an overview of
various kinds of auctions and their
properties
Auction A
• On the sheet of paper given to you, you have been assigned an ID
number. Please write down your name next to the ID number
• The sheet shows your “Value” of the item (for example, a TV set)
being auctioned off to the highest bidder
• This value was chosen randomly and independently by a computer
so that each integers between 400 and 500 has a 1/101 chance of
being picked. This is your private information. Please do not let the
others see it.
• In Auction A, each of you will be asked to submit a Bid
• The person who submits the highest bid will buy the item, and pay
the bid price. The profit of this person will be his/her (Value – Bid).
• If your bid >your value, and you are the highest bidder, you will incur
a loss
• All other participants in the auction will earn zero profit
• Any questions?
• Fill out the upper and lower parts of the sheet.
Auction B
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In order to save time, we shall conduct a second kind of auction
simultaneously with Auction A.
In the second auction, called Auction B, the rules are slightly different.
The value of the object you are bidding for is the same, given on your sheet.
As in Auction A, the highest bidder will buy the object.
However, unlike Auction A, the price to be paid by the highest bidder will be
the second highest bid price, not the first highest bid price.
In other words if your bid of 10,000 is the highest bid, and 9900 is the
second highest bid, you get to buy at a price of 9900.
Suppose you were also bidding for the same object in this second auction.
Write down your bid next to your first bid on the right hand side.
Remember, these are two independent auctions.
Any questions?
Fill out the upper and lower parts of the sheet with your bids in both
auctions.
Tear off the lower half of the sheet and return it to us.
Auction C
• You, and the other members of the class, are each bidding for
the right to explore for oil in an offshore tract of 10,000
hectares. If you discover oil or gas, you would have the right
to extract and sell it
• The amount of oil in the tract, V, has the value between 401
and 500 million. Every integer in range 400-500 has 1/101
chance of being the value of oil. You do not know this value.
• Each member of the class has conducted his/her own survey
and obtained an independent estimate , R(i), of the value of
the deposit. The results of the surveys are only
approximations with an error of plus or minus 10 crores. For
example, if the true value of the deposit is 425, each number
between 415 and 435 has 1/21 chance of being the report of
the survey. No report of the survey would be less than 400 or
more than 500.
Rules of the Auction
• It is a sealed bid auction
• After you have the chance to look at the report of your
surveyor, you will be asked to submit a bid for the oil
tract.
• The highest bidder will win the auction and pay the
amount bid B(i). He/she would also receive the actual
amount of oil V, not the amount given in your survey
report, R(i)
• The profit of the person who wins the auction will be
equal to the value less the bid price = V – B(i)
• The profit of all others will be zero.
• This auction may be repeated more than once
Environment of Auctions
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Private vs. common value
One-sided vs. two-sided
Sealed vs. open
First-price vs. second and other
Discriminating vs. uniform price
Institutions of Exchange
• Auctions are common institutions of
exchange
– English auction (estates, cars)
– Dutch auctions (flowers in Amsterdam)
– Double auctions (stock exchanges—Class 1)
– Posted price auction (retail stores)
Properties of Auctions
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Allocative efficiency
Revenue generation
Distribution
Enforcement of rules and opportunities for
collusion
• Strategic equivalence of auction forms
• Bidding strategies