Week 1

Question 1

Three ways of selling an item

Answer 1

1. Fixed price, sell directly
2. Negotiate directly
3. Create competition (Auction)

Question 2

Three objectives of Auctions

Answer 2

1. Maximise selling price
2. Obtain buyers evaluation of item
3. Maximise number of bids

Question 3

Independent Private values

Answer 3

subjective valuation based on idiosyncratic aspects (experience, personal taste + history)

Question 4

Common Value

Answer 4

Objective valuation based on market price (doesn’t mean everyone has the same expectations -> re-selling items)

Question 5

English Auction

Answer 5

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

Question 6

Dutch Auction

Answer 6

descending, stops at first price (know highest possible price)
1. stop: Tradeoff between amount to pay and probability of winning
-> Expected price: V1- something

Question 7

First-price sealed-bid auction

Answer 7

submission of sealed bids (no opportunity to review)
1. stop: Tradeoff between amount to pay and probability of winning
-> Expected price: V1- something

Question 8

Second-price sealed-bid auction

Answer 8

highest bidder pays value of nth bid
1. stop: your valuation
-> Expected price: V2

Question 9

Auction when trying to extract information

Answer 9

Second-price sealed-bid auction (get all values, incentive to bid V1)

Question 10

Auction when avoiding buyer collusion

Answer 10

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)

Question 11

Auction to minimise transaction cost

Answer 11

Dutch Auction (quick)
English Auction (time limit)
Technology offers minimum transaction cost

Question 12

Auction for efficient Allocation

Answer 12

English auction (Bidder with V1will always bid and will probably make sure to use it in a good way)

Question 13

Auction to maximise Expected Value

Answer 13

All Types, as we don’t know which of V2 or V1-something is higher

Question 14

Highest Bid Benchmark case

Answer 14

1. risk neutral bidders
2. bidders have IPV
3. symmetric bidders (not able to identify)
4. payment is function of bids alone
5. same number of bidders
   -> all Types yield same price in average

Question 15

How to deal with risk adverse bidders

Answer 15

take advantage, increase uncertainty
First-price sealed-bid auction

Question 16

How to deal with correlated values

Answer 16

allow valuations to converge, increase transparency
English auction (competitive as people look to others for valuation, price gets pushed up)

Question 17

How to deal with valuation asymmetry

Answer 17

1. hide it to maximise profit (First-price sealed-bid auction)
2. artificially enhance competition (Discriminatory auction)
   
   • handicap (procurement): make life for bidder with V1 difficult
   • favorism: favour solutions of V2/3 to increase bidding aggressiveness

Question 18

How to deal with information asymmetry

Answer 18

1. make information available
2. english auction (learning opportunity)
   - knowing who has superior information is crucial

Question 19

The winners Curse

Answer 19

Winners often overestimate value (remind competitors of this to prevent it)
driven by: common value, competition and uncertainty

Question 20

What makes SPSBA attractive for bidder

Answer 20

• 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