12: Auctions

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12 Auctions
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Auctions

• In this section we shall learn
• How different types of auctions allocate goods
• How to buy goods in auctions
• How to sell goods at auctions
• Strategies, legal or otherwise, to improve your
  outcome from an auction

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Types of Auction

• Ascending or descending
• Open outcry or sealed bid
• First or second price or another
• Winner pays, all pay or some other system
• Common-value
• Private value

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Types of auction

• In an ascending auction prices rises and stop
  when nobody further wishes to bid.
• In a descending auction price decreases in and
  stops as soon as anyone bids.

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The stupid Americans will never find our weapons
of mass destruction!!!
Dont worry Ali
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Lets make a deal!!

• Each of you will be given a number of MMs to
  bid for a desirable object
• If you win the auction you keep the object and
  any MMs you have left over

English Auction Open outcry Ascending Highest
bid is paid
Dutch Auction Open outcry Descending Highest
bid is paid
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Types of auction

• Open outcry or sealed bid
• In an open outcry auction bids are called out for
  all to hear
• In a sealed bid auction bids are sealed in
  envelopes and only the auctioneer sees them

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Types of auction

• First price
• The highest bidder pays their own bid
• Second price or Vickrey
• The highest bidder pays the price bid by the
  highest losing bidder

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Now its getting even harder
Bachelorette number 2
UmUmm..Its so hard
I thinkno ..Im not sure
Oh but I think I choose
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Lets make another deal!!

• Each of you will be given a number of MMs to
  bid for a desirable object
• If you win the auction you keep the object and
  any MMs you have left over

Vickrey Auction Sealed bid Ascending 2nd
Highest bid is paid
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Types of auction

• Winner pays
• Only the winner pays
• All pay
• Everyone that bids pay some fraction of their bid
  even if they dont win

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At least I still have my virgins
You know Ali being a dictator isnt as much fun
as it used to be!!
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Boy have I got a deal for you!!

• Each group has to bid for an object
• If you win the auction you keep the object and
  pay nothing
• If you lose the auction you pay whatever you bid

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Types of auction

• All pay
• These are very common
• Political race
• Sports contest
• Competition for promotion in a firm.
• Each competitor bids
• Raises funds
• Trains and misses income from other work
• Does unpaid overtime.
• Only one player gets the object
• Wins the election
• Wins the race
• Gains promotion.

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Types of auction

• Common value
• The value of the object is the same for all
  bidders
• But each bidder only has an imprecise estimate of
  the value
• Examples

• You buy an oil field lease but dont
  know exactly the
• size of the oil reserve

• You buy a Rembrandt anticipating reselling it at
  a profit

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Mega-Lo-Mart

• You are a corporate raider and are considering
  making a take-over bid for Mega-Lo-Mart .
• Mega-Lo-Mart is worth between 0 and 10 billion
• The true value is known by the current management
• You only know that Mega-Lo-Mart are worth between
  0 and 10 billion with each possible value being
  equally likely.
• If you take over you will run the company better
  and its value will increase by 50
• What do you bid?

5 Billion Yep!!
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Mega-Lo-Mart

• The expected value of Mega-Lo-Mart is 5 billion
  under the current management and 7.5 after your
  take-over.
• Any bid between 5 and 7.5 should then be
  profitable.
• Offer b
• If the current value of the company is less than
  b your offer is accepted
• The you can expect the current value of the
  company to be b/2 if you win.
• So the company is expected to be worth in your
  hands
• (1.5)(b/2) 0.75b lt b!!
• This is the Winners Curse

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The Winners Curse

• Watch the BBC America TV show Location,
  Location, Location
• Observe sealed bid property auctions that the
  experts claim to always win!!
• See experts incur the Winners Curse!!

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The Winners Curse
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Types of auction

• Private value
• The object has different values to different
  people
• Bidders know their own values but not the values
  of others
• Example A Little Michael Jackson doll is up
  for auction, some loath and others love the
  little scamp!!

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Bidding strategies

• Depend on the type of auction
• English auction (ascending, open outcry, first
  price)
• If your valuation is V bit e above the previous
  highest bid as long as the bid is less than V.
• Highest valuation wins auction efficiency
• Winning bid second highest valuation
• First price sealed bid
• If you bid V and you are the highest bidder you
  will have paid more the you need to
• Shade your bid to trade off the probability of
  losing the object against the gain from paying a
  lower price
• Dutch auction (descending, open outcry, first
  (only) price)
• Price drops automatically, first to say stop wins
  the object at that price.
• Shade your bid, wait a little after the price has
  fallen below V, trade off the chance of losing
  against the reduced price

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How not to bid at an auction
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Inefficiencies

• Arise when
• A mutually advantageous trade fails to
  materialize
• The sale price is above the buyers reservation
  price or below the sellers reservation price
• First-price auction
• Highest valuation may be higher than sellers
  value
• But bid-shading results in lower bid
• Second-price auction
• Highest valuation may be higher than sellers
  value
• But second-highest value, which determines the
  price, might not be

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Selling at auction

• The seller can choose
• The auction type
• Must trade off bid shading (Dutch, First Price
  Sealed Bid, All Pay) against lower unshaded sales
  prices (English, Second Price Sealed Bid)
• A reserve price to put on the object
• Choice depends on beliefs about the distribution
  of sellers valuations

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Manipulating auction outcomes

• Strategies available to sellers
• Second price auctions
• A phantom bid may be placed after the seller
  knows the other bids
• Place a bid just below the highest bid
• Essentially makes a second-price auction a
  first-price auction
• English Auction plants
• fake bidders to drive up the price

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Manipulating auction outcomes

• Strategies available to buyers
• Cast doubt on objects value
• Reduces others bids in both second and first
  price auctions.
• Collusion
• Form bidding rings
• Need to stop ring members cheating on each other
• Agree to hold secondary auction after the object
  is obtained and split the difference between
  winning bids in first and second auctions
• Rotation of winning bids