Definitions
Auction: a process of buying and selling goods
through bids for an optimal price.
Auctions must meet a reserve price (the
minimum price for which a seller is willing to sell
a good or service). If the item does not sell at or
above the reserve price, then the auction house
retains ownership of the object.
Types of Auctions
(There are many types of auctions, but these are the most popular ones)
English auction
Sealed first price auction
Dutch auction
Sealed second price (Vickrey) auction
English Auction
Also known as “Open Price Ascending Auction”
Multiple bidders
Ascending bids (get higher as you go)
Next highest bid is known
Highest bidder wins and pays his own bid
First Price Sealed Auctions
Multiple bidders
One bid per buyer
Bidders place bids simultaneously
Highest bid wins
Closed auction (nobody knows what the other bids
are)
Highest bidder wins and pays his own bid
Dutch Auctions
Also known as “Open descending auctions”
Auctioneer begins with the highest asking price, which
keeps decreasing until one bidder accepts the
auctioneer’s price.
Multiple participants; one bidder
First bidder wins and pays bid price
Not widely used in practice
Example: flowers in Holland
Second Price Sealed Auction
Also known as “Vickrey Auction”
Closed (No one sees what others are bidding)
Simultaneous bidding
Identical to sealed first price auction, except the
winner pays the price of the second highest bid,
plus a bidding increment.
Not commonly used, but important to auction
theory.
Japanese Button Auction
Everyone is entered in the auction. When the
price exceeds a bidder’s valuation, the bidder
will drop out of the auction.
Equivalent to the English second price auction.
Other Definitions
:Uses
proxy bidding
continued..
Winner’s Curse: the fact that, in a common
values auction, winning bidders tend to be those
who have overestimated the good’s value.
Buyer’s Curse: the tendency to purchase at a
loss
How would you classify this?
http://www.youtube.com/watch?v=JMN30huZLxk
Game Theory
First price sealed auction
If I win my payoff = (v-b)pr(win)
Game Theory
Second price sealed auction
Equilibria:
One person bids $10,000,000 and the other bids $0
Each person bids their own value
Competition Between Auctions
Auction House Methods
Price guarantees
Buyer’s premium
Buy-in penalties
Government
Best Value contracts created by Clinton
Administration in 1990s
Reverse auctions: Where prices spiraling down
Ex: Shaving as much as 40% off of defense
contracts
Concerns about quality
Auctioning Licensing Rights
Bibliography
http://vita.mcafee.cc/PDF/JEL.pdf
http://excen.gsu.edu/workingpapers/GSU_EXCE
N_WP_2008-02.pdf
http://cowles.econ.yale.edu/P/cd/d15b/d1562.pd
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