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ECO 436 . Auction Theory . Four Basic Types of Auctions. Ascending-bid auction (open, oral or English auction) Descending-bid auction (Dutch Auction) First-price sealed-bid auction Second-price sealed-bid auction (Vickrey Auction). Key Feature – Asymmetric Information.

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Eco 436

ECO 436

Auction Theory


Four basic types of auctions
Four Basic Types of Auctions

  • Ascending-bid auction (open, oral or English auction)

  • Descending-bid auction (Dutch Auction)

  • First-price sealed-bid auction

  • Second-price sealed-bid auction (Vickrey Auction)


Key feature asymmetric information
Key Feature – Asymmetric Information

  • Private-value model – each bidder knows how much he/she values the object but value is private to him/her.

  • Pure common value model – actual value is the same for everyone but bidders have different private information about what that value actually is.


Winner s curse
Winner’s Curse

  • You win only by exceeding others’ maximum valuation of the object

  • Overpay


Revenue equivalence theorem vickrey
Revenue Equivalence Theorem (Vickrey)

  • Assume each of a given number of risk-neutral potential buyers of an object has a privately known signal independently drawn from a common, strictly increasing, atomless distribution. Then any auction mechanism in which (i) the object always goes to the buyer with the highest signal, and (ii) any bidder with the lowest-feasible signal expects zero surplus, yields the same expected revenue (and results in each bidder making the same expected payment as a function of her signal).


Results
Results

  • Applies to private-value and common-value models

  • All standard auctions yield the same expected revenue under the stated conditions


Practical issues in auction design
Practical Issues in Auction Design

  • Collusion

  • Attracting many bidders

    • Winner’s curse

    • Predation

  • Reserve Price – minimum amount the winner is required to pay

  • Loopholes to game the auction

  • Market structure


Good auction design
Good Auction Design

  • Good auction design is not “one size fits all” and must be sensitive to the details of the context


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