QuickMBA / Economics / Auctions


Auctions are mechanisms for determining prices. Auctions often are classified as one of the following auction types:

  • First-price sealed-bid auction - winner pays his bid. In this case, one should bid below one's value an amount that depends on how many other bidders there are. The more bidders, the closer to one's value that one should bid. There is a tradeoff between profit and the frequency of winning.

  • Second-price sealed-bid auction - winner pays highest losing bid. In this type of auction, the optimal strategy is to bid one's value.

  • English auction - auctioneer begins with a low price. Bidders raise their bids until nobody is willing to bid higher. The optimal strategy in an English auction is to bid up to one's value, staying in the auction until the bids exceed one's value.

  • Dutch auction - auctioneer calls out prices beginning with a very high value and gradually reduces it. The first bidder to accept an offered price wins. The Dutch auction gets its name because of its use in the flower markets in Holland. Note that eBay defines Dutch auctions differently. On eBay, a Dutch auction is one in which there are multiple units of the same item and all successful bidders pay a price equal to the lowest successful bid.

Auctions also may be characterized by whether the value is common (the same) to the bidders, for example, an oil lease, or by whether the value is private (different) to each bidder.

Single-round sealed-bid auctions can be analyzed as multiple-player, simultaneous choice games. In a sealed-bid auction, one has a tendency to win when one bids more than one's value. This phenomenon is known as the winner's curse. In an open-auction, the winner's curse is less pronounced because information from other bidders helps one to value it.

One's strategy depends on whether other bidders are simply bidding their value or are "shading" their bids. One can evaluate potential strategies using deviation logic. This involves asking oneself if one would utilize the strategy if everybody else were utilizing it.

Recommended Reading

Vijay Krishna, Auction Theory

  QuickMBA / Economics / Auctions

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