ECO 436

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# ECO 436 - PowerPoint PPT Presentation

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

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
• 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
• You win only by exceeding others’ maximum valuation of the object
• Overpay
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
• 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
• 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 is not “one size fits all” and must be sensitive to the details of the context