Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Y3 Micro > Lecture 10 - Advanced Auction Theory > Flashcards

Lecture 10 - Advanced Auction Theory Flashcards

1
Q

Describe “The Winner’s Curse”

A
  • When bidding in an auction where Common Values apply, whoever wins the auction will be whoever has the highest valuation
  • The true or market value is likely to be the average of those market valuations.
  • The highest valuation is thus likely to be too high.
  • The winner of the auction will have over bid, thus becoming cursed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

In the Winner’s Curse, how does a bidder view a value of the good?

A
  • Each bidder has an unbiased private estimate (signal si) of the true value v.
  • E(V/si) = si
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

If in bidder believe that errors are equally likely to be positive or negative, what does this say about the distribution of estimates?

A

They will be symmetric

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Where are bidders estimates drawn from?

A

A probability distribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Do all distributions look like a symmetrical bell curve?

A

No, some look like a straight horizontal line

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is on the 2 axes of a probability distribution curve?

A

Frequency and si

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is true about the error size of the most “optimistic” estimate?

A

This estimate will have the largest positive error

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are bids a function of/dependent on?

A

The estimates, i.e. bi= f(si)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Which side of a distribution is the winning bid drawn from? What is relevent about this?

A

The right hand side, hence is is likely higher than the true value of the good. i.e. b>v

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What happens to a distribution if everyone revises their estimates downwards, conditional on them winning?

A

It shifts to the left

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the optimal strategy to avoid The Winner’s Curse?

A
  • Revise estimate (si) downwards, conditional on this being the highest.
  • Calculate the optimal bid from the revised estimate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What happens to the size of the downward revision when the numbers of bidders increase?

A

The more bidders there are, the greater the downward revision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

When trying to bid optimally, what di we assume about estimates (of si) and their range?

A

That they lie in the range 0 to 2v and are distributed uniformly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Is a person’s error more likely to be positive or negative?

A

Equally likely that error is positive or negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the only circumstance that matters?

A

If si is the highest estimate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are we assuming about each bidder?

A

That they are seeking to maximise their expected surplus

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is effectively applied to the private estimate of si when trying to bid optimally?

A

A discount factor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What happens to the revision when N tends to infinity? What does this show?

A

the revision tends closer to si/2, where the higher the N, the greater the downward revision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What discount factor is applied to the private estimate si?

A

si(N+1)/2N

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Is the highest bidder of 100 bidders or 10 bidders likely to be further from the true value?

A

100 bidders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Theoretically does the sale price converge to as the number of bidders increases? Why?

A

The true value, as more information is acquired and ‘aggregated’, even though any individual bidder has only partial information.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What do the Law of Crowds state?

A

A large enough crowd is generally more correct in predictions than expert economists.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

In research, does the sale price of a good converge to the true value as bidders increase?

A

Sometimes, but not generally, particularly where information is costly, and thus remains “private”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What does the optimal bid depend on?

A

The auction format.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What should the optimal bid be in a First Price Sealed bid auction for a common value good?

A

The optimal bid would be the original estimate si revised downwards twice by
[(N-1)/N] and [(N+1)/2N]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Should be actual bid always be this revised estimate? Give an example

A

No, as it depends on the kind of auctions, eg in an English auction the strategy, having revised the estimate downwards to minimise the winner’s curse, is to bid up to the revised estimate.

27
Q

When is the discount of [(N-1)/N] applied?

A

A discount [(N-1)/N] is applied when the auction is a Dutch or a First Price Sealed Bid.

28
Q

When is the discount of [(N+1)/2N] applied?

A

A discount [(N+1)/2N] is applied when the Winner’s Curse is an issue.

29
Q

What is the Revenue Equivalence Theorm?

A

Four auction types produce the same price on average

30
Q

What does Revenue Equivalence Theorm Assume and depend on?

A
  • Independent private values model
  • Risk neutrality
  • Symmetric bidders i.e. all bids are drawn from the same distribution
  • Optimal bidding ie Nash equilibrium strategies
  • Payment is a function of bid only
31
Q

What is the price paid, assuming everyone is logical?

A

The second-highest valuation

32
Q

When does revenue equivalence cease to apply?

A
  • Risk-averse bidders
  • Asymmetric bidders
  • Affiliated valuations
33
Q

Do risk-neutral agents prefer a £100 expected return or a certain £99? Why?

A

The £100 expected return, as agents are indifferent between expected and certain rewards.

34
Q

Do risk-averse bidders prefer a higher or lower probability of winning?

A

Higher

35
Q

In an English or Vickrey auction, how does risk aversion affect the optimal bidding strategy?

A

It doesn’t, risk aversion doesn’t change the optimal bidding strategy in these scenarios.

36
Q

How will a risk-averse bidder act in a Dutch auction or a First Price Sealed bid auction?

A
  • In Dutch Auction call out sooner (closer to private value)
  • In 1st price SB will bid closer to private value
37
Q

Why is risk aversion relevant for the seller to know?

A

Because now the seller is no longer indifferent to the auction format.

38
Q

Instead of maximising expected surplus, how does risk aversion change what individuals are maximising in Dutch and First Price SB auctions?

A

They are now maximising expected utility rather than expected surplus. Which trades off between bidding below private value (increase surplus) and increasing the risk of another bidder winning

39
Q

Define asymmetric bidders:

A

Bids drawn from two or more different (distinct) distributions. One of these groups has a higher average private value`

40
Q

Assuming bidders are aware of the two groups, why may asymmetric bidders effect First Price SB auctions?

A
  • ‘Low value bidders bid closer to their private values
  • ‘High value’ bidders bid further below their private value
  • So the item may not be sold to the bidder with highest private value, therefore inefficient (ie loss of rent for Seller)
41
Q

In Affiliated Values, if a bidder was to find out that other bidders have high values, what would they do with their bid?

A

Revise it upwards

42
Q

In Afilliated Values are private values unbiased and independent?

A
  • Private values are not independent
  • Bidders are influenced by other bidders’ valuation
43
Q

On average, which auctions are predicted to produce the highest price for the seller? Why?

A

The English auction, as bidders can observe remaining bidders and thus acquire information about their values. Due to the reduced effect of the winners’ curse, they are also less cautious, and the incentive to shade bids downwards is reduced.

44
Q

List 3 different kinds of auction:

A
  • War of Attrition Auction
  • Double Auction
  • Sequential Auction
45
Q

What is a “War of Attrition” auction?

A

Where all bidders keep on paying until they give up competing/bidding
- This is prevalent in R&D races

46
Q

Where are Double Auctions often used, and what do they contain?

A

Financials institutions, and they often contain “Bids” and “Asks”.

47
Q

What is a sequential auction? Give 1 issue of them

A

A sequential auction is an auction in which several items are sold, one after the other, to the same group of potential buyers.
- An issue is whether prices rises, falls, or stays con=stant as the auction proceeds.

48
Q

List other issues with auction theory:

A
  • Collusion
  • Externalities between bidders
  • Jump bidding
  • Multi-unit auctions
49
Q

Give an example of externalities interfering with auction theory.

A

If an unsuccessful bidder cares who wins

50
Q

What is jump bidding?

A

A sudden large bid increment, for eample in takeover battles

51
Q

What are multi-unit auctions?

A
  • Bids for blocks of items
    e.g. share auctions: each bidder offers a price for different-sized shares
  • A uniform price auction is one where the highest bidders win and highest possible price paid such that supply equals demand
52
Q

What is often true about equilibrium prices in uniform price auctions?

A

They are often quite low

53
Q

Explain 2 solutions for the issues facing uniform price auctions.

A
  • Seller discriminates on price; bidders pay the price they bid for each share
  • Seller introduces supply uncertainty; quantity becomes endogenous
54
Q

Explain 2 solutions for the issues facing uniform price auctions.

A
  • Seller discriminates on price; bidders pay the price they bid for each share
  • Seller introduces supply uncertainty; quantity becomes endogenous
55
Q

Give a way a seller can always increase its expected return:

A

By introducing a Reserve Price

56
Q

Why are reserve prices useful in avoiding losses for the seller?

A
  • If vS > v1
  • A reserve price (r) = vS would avoid a loss
  • If r > v1 > vS there is no sale, but a loss is avoided
57
Q

How can a reserve price always make a seller better off? (assuming the product sells)

A

If r>vs

58
Q

To have any impact in an English auction, what is true about the reserve price, if it is to have any potential rent increase?

A

It must lie between v1 and v2

59
Q

What may happen if the reserve is too high?

A

The item may not be sold, so any potential gain to the seller is lost.

60
Q

When setting a reserve price, what is therefore the seller’s objective?

A

To maximise their expected return

61
Q

Whatis the optimal reserve price formula, assuming private values are distributed uniformly between 0 and 1. What does this mean for when vs increases?

A

r = (1+vs)/2
As vs increases, so does the reserve

62
Q

Why do firms use loyalty cards>

A

To gain information from their clients regarding to their pricing preferences.

63
Q

What did Alfred Marshall find?

A

That do to elasticity of demand, you can increase profit by decreasing output

64
Q

Give 6 potential motivations for sellers:

A
  • Maximise Profit
  • Minimal Loss
  • Competition
  • Distributive
  • Economic Growth
  • Political

Y3 Micro (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions