WEEK 5 Auctions Flashcards
Dutch Auctions, English Auctions, Strategies, Private Auctions, Cartels
Explain the English Auction. Example, order of play, is it best to tell the truth?, what is the payoff and what is the surplus
The bid goes up and the highest bidder wins the auction. or example bidding on art, start price £100 and final bid is £250. It is best to tell the truth as if you have the highest value you will win. The payoff is you pay the price of the second highest bidder. The surplus is (your value of item - price you actually paid for item). or V1 - V2, or V1 - b1 as b1 is your bid.
Explain the Dutch Auction. Example, order of play, is it best to tell the truth?, what is the payoff and what is the surplus. Explain why you do not bet your valuation.
The price drops and first one to accept, wins the auction. Example flowers start at £30 and drops to £23 and someone buys. It is best to always lie. The pay off is V1-B1 multiplied by the probability that your bid is higher than buyer 2’s bid which is a fraction of their own valuation
You do not bet your valuation as if you have the highest valuation and you bid then you are guaranteed to win but you gain no surplus. So, people bet a fraction of their valuation.
Private Auctions: Explain reserve prices and if they should be higher, lower or in-between valuations.
Reserve prices are the lowest price a seller is willing to let their item go for. Reserve prices should be in between the highest valuation and the lowest valuation.
If the sellers desire to sell an object is below the MR will there be a reserve price?
No.
The more risk averse the buyer then what happens to the reserve price?
The lower the reserve price is the more risk averse as they want to sell their item and feel it is riskier the higher the minimum price.
Equations must remember:
Risk Neutral Payoff bi=?
Okay and understanding risk is r, what is the expected payoff due to risk averse
Hint it depends
b1 = (N-1/N)V1 for risk neutral
b1 = (N-1/N-r)V1 as risk depends on the person, the higher the risk the higher the bid, the lower the risk the lower the bid
Explain how someone with the highest valuation who is risk neutral can lose to the second highest valuation bidder if they are not risk neutral
If the second is risky they may bid closer to their valuation, whereas risk neutral’s bid could be lower than this thus losing
Criminal Auctions: Which one can you cheat in English or Dutch
Can cheat in Dutch not English
Explain how surplus is increased being in the Criminal Auction Ring
In a Dutch auction the bid paid is the second highest valuation’s fraction bid. If the top 3 highest valuation bidder are part of the same ring then the fourth person is going to end up being ‘second’ thus paying that will increase the surplus. If the 5 bidders are 20 17 15 11 9 then the person who is 20 ends up paying 11 rather than 17.
How can someone cheat in a criminal auction ring against their fellow criminals? Use the risk neutral valuation equation to explain. N-1/N V1
If there are 6 bidders and 3 are in a ring.
Originally the highest bidder would have a valuation of 6-1/6 V1, assuming V1 is 20 then = 16.67. However, he is in a ring so his next two highest valuation partners wont be bidding so theres only 4 people actually bidding so 4-1/4 x 20 = 15. So the ring leader is going to bid 15. So if someone in the ring then says to someone in the remaining 4 that is not the ring leader to bid 15.01 for example then they would win and can split the surplus. By cheating the cheater knows the highest bid and can use this to his advantage.
