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ECO 436

ECO 436 . Auction Theory . Four Basic Types of Auctions. Ascending-bid auction (open, oral or English auction) Descending-bid auction (Dutch Auction) First-price sealed-bid auction Second-price sealed-bid auction (Vickrey Auction). Key Feature – Asymmetric Information.

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ECO 436

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  1. ECO 436 Auction Theory

  2. Four Basic Types of Auctions • Ascending-bid auction (open, oral or English auction) • Descending-bid auction (Dutch Auction) • First-price sealed-bid auction • Second-price sealed-bid auction (Vickrey Auction)

  3. Key Feature – Asymmetric Information • Private-value model – each bidder knows how much he/she values the object but value is private to him/her. • Pure common value model – actual value is the same for everyone but bidders have different private information about what that value actually is.

  4. Winner’s Curse • You win only by exceeding others’ maximum valuation of the object • Overpay

  5. Revenue Equivalence Theorem (Vickrey) • Assume each of a given number of risk-neutral potential buyers of an object has a privately known signal independently drawn from a common, strictly increasing, atomless distribution. Then any auction mechanism in which (i) the object always goes to the buyer with the highest signal, and (ii) any bidder with the lowest-feasible signal expects zero surplus, yields the same expected revenue (and results in each bidder making the same expected payment as a function of her signal).

  6. Results • Applies to private-value and common-value models • All standard auctions yield the same expected revenue under the stated conditions

  7. Practical Issues in Auction Design • Collusion • Attracting many bidders • Winner’s curse • Predation • Reserve Price – minimum amount the winner is required to pay • Loopholes to game the auction • Market structure

  8. Good Auction Design • Good auction design is not “one size fits all” and must be sensitive to the details of the context

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