Auction Theory Flashcards
List the 5 types of auction
- English / ascending-bid
- Dutch / descending-bid
- First-price sealed-bid
- Second-price sealed-bid
- All-pay
What is an English / ascending-bid auction? What is it used to sell?
Start at reserve price and raise until a winner is left
Eg. art, antiques
What is a Dutch / descending-bid auction? What is it used to sell?
Start high and cut until somebody bids
Eg. flowers
What is a first-price sealed-bid auction? What is it used to sell?
One bid per bidder
Eg. government contracts
What is a second-price sealed-bid auction? What is it used to sell?
Highest bidder wins and pays second highest bid
Eg. postage stamps
What is an all-pay auction? What is it used to sell?
Everyone pays at every round until one remaining bidder gets the goods
Eg. war litigation
Which 2 pairs of auction types are strategically equivalent? Why? How should you behave in each?
- Dutch and first-price sealed-bid
Auctions give same result - highest bidder gets the goods at his reservation price. Should bid low if you think your valuation is much higher than everybody else’s - English and second-price sealed-bid
Should bid truthfully
What is strategic equivalence?
Equivalence in who will win
What is revenue equivalence?
Equivalence in how much money on average
What is the Revenue Equivalence Theorem?
You get the same revenue from any well-behaved auction under ideal conditions
Give 3 ideal conditions needed for the Revenue Equivalence Theorem to hold
- No collusion
- Pareto efficiency (highest value bidder gets the goods)
- Independent valuations
What is a private-value auction?
Each bidder’s value vi is exogenous. In a second-price auction, everything you buy is a bargain
What is a public-value auction?
Each item has a true price which bidders estimate at v + ei. Winner’s curse: the buyer is whoever overestimated the most
Which two extremes do most real auctions lie between?
Private-value and public-value
What is a bidding ring?
Bidders collude to buy low, have a private auction later, split the proceeds
List all 10 things that can go wrong in an auction
- Bargain in private-value second-price auction
- Winner’s curse in public-value auction
- Bidding rings
- Rigging of second-price auctions
- Entry detection/deterrence
- Predation
- Risk aversion
- Signalling games
- Budget constraints
- Externalities between bidders (eg. arms sales)
Are first-price or second-price auctions harder to rig?
First-price
Give an example of entry deterrence
An auction required bidders to draw up a detailed programming plan
Give an example of entry detection
If a bidder knows they have no competition they can bid as low as they like
What is predation?
We’ll top any other bid
What are the effects risk aversion in auctions?
If you prefer a certain profit of £1 to a 50% chance of £2, you’ll bid higher at a first-price auction
How can signalling games be applied in an auction?
Showing aggression by a price hike
How do budget constraints effect auctions?
If bidders are cash-limited, all-pay auctions are more profitable
What is a combinatorial auction?
Externalities lead to preferences for particular bundles of goods. Eg. bid an amount for A+B+C
What is the mechanism of an ad auction?
Second-price auction mechanism but tweaked to optimise platform revenue
Explain how ad auctions work
Bidders bid price pi
Platform estimates ad quality ei (relevance x clickthrough rate)
Ad rank = pi x ei
Ads are then ranked by ad rank
Cost per click (that advertiser has to pay) = (pi x competitor ad rank) / own ad rank
What are the ethical aspects of ad auctions
Translated to social media, ad quality can easily segue into virality. So if your ads are good clickbait you pay less. Many sites tend to serve ever more provocative and extreme content
