Auctions

Question 1

What are the 4 types of auction? Which are equivalent to each other?

Answer 1

English, Dutch, 1st Price, 2nd Price.

English = 2nd Price
Dutch = 1st Price

Question 2

What are the assumptions underlying the revenue equivalence theorem?

Answer 2

• Common distribution of values
• Independent private valuations
• (Same no. of bidders)
• Bidders = risk neutral
• winner = highest bidder
• (lower value bidder expects 0 surplus)

Question 3

What are the dominant strategies for 1st price (Dutch) auctions and 2nd price (English) auctions? (Given RET)

Answer 3

1st Price: (follows a Bayes-Nash equilibrium);
Low valuation bids truthfully,
High valuation = continuous and mixed bidding strategy

2nd Price: Low and High bid truthfully

Question 4

What RET assumptions have to be relaxed for a seller to pursue an optimal auction?

Answer 4

• Independent valuations -> correlated estimates

-Risk neutral bidders -> risk averse bidders

Question 5

[For bidders with correlated estimates] if there are optimistic sentiments about the product you are selling what Auction would you deploy?

Answer 5

English over Dutch - estimates = positively correlated between bidders :. Will drive up valuations (+ price) and maximise revenue

Question 6

If bidders are Risk averse what is the optimal auction type?

Answer 6

Dutch - in risk of loss bidders ^ valuation -> ^ bid earlier -> ^ Revenue