Strategies for Assessing and Increasing Demand Flashcards
Surveys have various advantages. Here are 4:
You can get large-scale data.
You can survey a broad pool of consumers.
You can elicit aggregate preferences.
You can do it relatively cheaply.
two common types of auctions:
English auction (open outcry) where the auctioneer opens the bidding with a minimum price and then each bidder can increase his or her bid.
Vickrey auction, the highest bidder wins the item, but only pays the amount of the second-highest bid. For this reason, this type of auction is often referred to as a “sealed-bid second-price auction”.
Sealed first-price auctions: buyers submit sealed bids. The highest bidder wins the auction and pays what he or she bid. Bidders might be motivated to bid below their WTP in order to ensure that if they win, they will capture some value.
The assumption of independent WTP is also called
the “private values” assumption. This means that each bidder’s valuation of the item is his or her own. It is not correlated with how much others would be willing to pay for the same item.
Can you guess what happens when the private-values assumption doesn’t hold? Which auction design works better for the seller?
If a bidder’s valuation for an item is influenced by how much others value it, then an auction that allows the bidding to be played out over time, such as the English auction, will typically generate more revenue than sealed bid auctions. Seeing others bid high for the item might convince you that the item is worth more than you thought and you might be willing to place a higher bid than you did at first.
CHOOSING FIXED PRICE VS AUCTION:
WTP & REVENUE
WTP: To start, there’s the issue of how informed sellers are about buyer valuations: if the seller knows a lot about WTP, there’s a far better chance he knows what price to directly set. On the other hand, the less information he has about the demand curve, the more sense it makes for a seller to run an auction.
REVENUE: A second consideration when deciding whether an auction is likely to generate more revenue than a fixed-price sale is the time it takes.
In a fixed price sale, the seller gives the buyer the option to buy the item at a given price, usually immediately. If the buyer chooses to purchase the item, she knows almost immediately whether or not she will receive it. In an auction, however, the buyer likely will not learn whether she will receive the item until the very end.
An auction will generate more revenue (and will be more likely to do better than a fixed-price sale) if the buyers’ valuations are relatively close together, since the highest WTP and the next-highest WTP will be close together.
The more uncertain a seller is about WTP, the more they prefer
an auction
If sellers are not time-constrained, they can set
a high fixed-price and then slowly lower it. So a fixed price is best. But if sellers have to sell now, then an auction is better since that guarantees the product is sold quickly.
If there is a large gap between the highest and second-highest WTP, then an auction may not be ideal since…
we know that revenue will only be equal to the second-highest WTP. Whereas with the right fixed price you might be able to capture the highest WTP.
Finally, if buyers can influence each other’s WTP (the setting of “interconnected” WTP), then a seller would prefer an ________
English auction – where potential buyers announce their bids aloud.
While the winner’s curse is surprising, it reinforces a fundamental idea about auctions and economics. You do well not by winning or obtaining a product. You win only
when the price you paid is lower than the true value.
The reason that auctions are effective at truthfully revealing buyer WTP is because of ___
competition: bid much lower than your true WTP and you risk losing the product. Bid too high and you risk overpaying if you win it.
The design of auctions is a very rich—and richly explored—topic. The “revenue equivalence” result says that, generally speaking, the design of auctions doesn’t matter: [explain why]
regardless of whether you have an open outcry auction, a sealed-bid second price (or Vickrey) auction, or a sealed-bid first price auction, in every case the winner will pay roughly the WTP of the 2nd highest bidder.
The revenue-equivalence result depends on an important assumption: that buyers have ___
private values. In other words, buyers’ WTP are independent of each other. When this condition is violated—for example, if bidder’s WTP will rise as they realize that other bidders have high WTP—auction design can matter.
The winner’s curse is one of the most sobering results in auctions. It says that ___
when buyers’ WTP are correlated (or, when they have common values)—for example, when bidding on natural resources, construction projects, or service contracts—then the winning bidder usually ends up overpaying. To avoid the winner’s curse, buyers usually shade their bids down from their (perceived) WTP.
Auctions are generally better for ____ than for ___ —since the latter are less likely to capture surplus. As a result, buyers may tend to prefer fixed price settings over auctions
Auctions are generally better for sellers than for buyers—since the latter are less likely to capture surplus.
