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Bidding for Discounts

Bidding for Discounts. Rand Costich US Postal Regulatory Commission. Two lessons. An auction can mimic declining block tariffs Careful design encourages bidders to reveal their true values. Block tariff. Block tariff Potential win-win, but . . . Block tariff Potential win-win, but . . .

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Bidding for Discounts

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  1. Bidding for Discounts Rand Costich US Postal Regulatory Commission

  2. Two lessons • An auction can mimic declining block tariffs • Careful design encourages bidders to reveal their true values

  3. Block tariff

  4. Block tariff • Potential win-win, but . . .

  5. Block tariff • Potential win-win, but . . . • Seller must guess

  6. How to get buyers to reveal demand?

  7. How to get buyers to reveal demand? • Descending clock auction can mimic declining block rates when selling many identical units of a good

  8. Clock displays price

  9. Clock displays price • Bidders respond with quantities

  10. Clock displays price • Bidders respond with quantities • Clock price descends

  11. Clock displays price • Bidders respond with quantities • Clock price descends • Bidders respond with new quantities

  12. Total quantity available is limited

  13. Naïve bidder (NB)

  14. Naïve bidder (NB) • First price on clock is tariff rate

  15. Naïve bidder (NB) • First price on clock is tariff rate • NB bids profit-max’ing quantity

  16. Clock price descends • NB bids new quantity or quits • Repeat

  17. If all bidders act like NB . . .

  18. If all bidders act like NB . . . • Should NB deviate?

  19. Bidding lower is win-lose— • 1. Total profit increases (if you win your desired quantity) • 2. Probability of winning declines at your desired quantity (because revenue for seller is lower)

  20. Bidding higher is lose-win— • 1. Total profit declines • 2. Probability of winning increases (because revenue for seller is higher)

  21. Potential winners are those with highest • average revenue per piece

  22. *One of my auction rules: bids from any round except the first may be accepted

  23. Bidding low creates a bid with • a higher av’ge rev per piece

  24. Bidding low creates a bid with a higher av’ge rev per piece • High probability of this low bid’s being accepted

  25. If this low bid wins, bidder gets • much less profit than honest bid

  26. If this low bid wins, bidder gets • much less profit than honest bid • Conclusion: Honest bidding • or shading slightly higher

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