6. Auctions

Question 1

In auction games, players called bidders devise…

Answer 1

…bidding strategies without knowing other players’ payoff functions.

Question 2

What are Market transaction games?

Answer 2

• type of auction used for differentiated products, especially
  unique items that don’t have established market values; i.e. natural resources such as timber

Question 3

Open outcry auction | Whats the difference between an ascending and a descending auction?

Answer 3

1. ascending: prices are increased until only one person is left
2. prices are decreased until someone puts up their hand

Question 4

Whats a sealed bid auction?

Answer 4

Bidders submit a bid simultaneously without seeing anyone else’s bid and the highest bidder wins Sealed bid auction

Question 5

Whats the difference between private value auction and common value auction?

Answer 5

1. private: each bidder knows his own valuation (it doesnt depend on someone elses information); problem: sometimes people are experts in a field or resale is possible
2. common: all bidders have the same valuation but they dont know what it is (valuation now depends on someone elses valuation

Question 6

Whats the best strategy for sealed bids and dutch auction bids? (where someone reduces the price until someone accepts and other is where everyone submits a bid at the same time)

Answer 6

• bidding an amount that is EQUAL to or SLIGHTLY GREATER than what you expect will be the 2nd highest bid, given that your value is the highest
• the winner is the person with the highest value, and the winner pays roughly the second highest price

Question 7

1. A seller will usually want an auction format that…..
2. A buyer collecting bids from a group of potential sellers will want an auction that….

Answer 7

1. … maximized the revenue from the sale of the product.
2. … minimizes the expected cost of the product.

Question 8

1. Whats the winners curse?
2. How can the winners curse be avoided?

Answer 8

1. happens in common value auctions, where the winners bid exceeds the common value items value (and he pays too much); happens when there is uncertainty about the true value of the good
2. rational budders shade or reduce their bids below estimates, and the amount of reduction depends on the number of other bidders, bc the more bidders, the more likely that the winning bid is an overestimate

the winners curse still happens often due to bounded (begrenzte) rationality

Question 9

In a private value auction, you should…

1.
2.

Answer 9

1. get as many bidders as possible
2. set a minimum bid equal to or even somehwat higher than the value to you of keeping the good for future sale

Question 10

In a common value auction you should…

1.
2.

Answer 10

1. use an open rather than sealed bid auction! bc english (open) common value auction generates greater expected revenue than sealed bid
2. reveal information about the true value of the object being auctioned (bc the greater the uncertainty about the value of an object, the greater the likelyhood of an overbid, and the greater the incentice for the bidder to reduce his bid)