Week 1 Flashcards
Three ways of selling an item
- Fixed price, sell directly
- Negotiate directly
- Create competition (Auction)
Three objectives of Auctions
- Maximise selling price
- Obtain buyers evaluation of item
- Maximise number of bids
Independent Private values
subjective valuation based on idiosyncratic aspects (experience, personal taste + history)
Common Value
Objective valuation based on market price (doesn’t mean everyone has the same expectations -> re-selling items)
English Auction
open, oral, ascending (learn, observe and revise own bids)
1. start late
2. small increment to avoid overshooting or big when scaring away emotional amateurs)
3. stop when everyone stops or when valuation is met
-> Expected price: V2
Dutch Auction
descending, stops at first price (know highest possible price)
1. stop: Tradeoff between amount to pay and probability of winning
-> Expected price: V1- something
First-price sealed-bid auction
submission of sealed bids (no opportunity to review)
1. stop: Tradeoff between amount to pay and probability of winning
-> Expected price: V1- something
Second-price sealed-bid auction
highest bidder pays value of nth bid
1. stop: your valuation
-> Expected price: V2
Auction when trying to extract information
Second-price sealed-bid auction (get all values, incentive to bid V1)
Auction when avoiding buyer collusion
First-price sealed-bid auction
Dutch Auction (no chance for retribution, incentive to increase bid)
NOT English (retribution)
NOT Second-price sealed-bid auction (pay above V1 and your own valuation)
Auction to minimise transaction cost
Dutch Auction (quick)
English Auction (time limit)
Technology offers minimum transaction cost
Auction for efficient Allocation
English auction (Bidder with V1will always bid and will probably make sure to use it in a good way)
Auction to maximise Expected Value
All Types, as we don’t know which of V2 or V1-something is higher
Highest Bid Benchmark case
- risk neutral bidders
- bidders have IPV
- symmetric bidders (not able to identify)
- payment is function of bids alone
- same number of bidders
-> all Types yield same price in average
How to deal with risk adverse bidders
take advantage, increase uncertainty
First-price sealed-bid auction
How to deal with correlated values
allow valuations to converge, increase transparency
English auction (competitive as people look to others for valuation, price gets pushed up)
How to deal with valuation asymmetry
- hide it to maximise profit (First-price sealed-bid auction)
- artificially enhance competition (Discriminatory auction)
- handicap (procurement): make life for bidder with V1 difficult
- favorism: favour solutions of V2/3 to increase bidding aggressiveness
How to deal with information asymmetry
- make information available
- english auction (learning opportunity)
- knowing who has superior information is crucial
The winners Curse
Winners often overestimate value (remind competitors of this to prevent it)
driven by: common value, competition and uncertainty
What makes SPSBA attractive for bidder
- only pay as much as you need to get the item (no overbidding -> good for people with less experience)
- can tell the website you IPV
- auctioneer can collect valuation of bidders and create demand curve
- stimulate participation
