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Comments on Milgrom (1989) and McMillan (1994) on “Auctions”. Nick Parker Econ 594ER October 29, 2007. Milgrom I. The ‘Winner’s Curse’ Painter wins a bid for an unfamiliar job but costs run much higher than anticipated. Why?

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comments on milgrom 1989 and mcmillan 1994 on auctions

Comments on Milgrom (1989) and McMillan (1994) on “Auctions”

Nick Parker

Econ 594ER

October 29, 2007

milgrom i
Milgrom I
  • The ‘Winner’s Curse’
    • Painter wins a bid for an unfamiliar job but costs run much higher than anticipated. Why?
    • Because each individual bidder’s estimates of costs are unbiased, the lowest bid must be biased downward
    • Remedy: spend time researching costs and bid conservatively
  • Equivalence of auction institutions
    • First-price auctions
      • sealed bid
      • Dutch
    • Second-price
  • Q: What is the dominant strategy is a 2nd price auction (equivalent to English outcry)?
    • Case 1: b1 > v1, v2 = b2
      • b1 > b2 and b2 > v1 implies net loss
      • b1 > b2 and b2 < v1 implies gain of v1 - v2
    • Case 2: b1 = v1,, v2 = b2
      • b1 > b2 implies gain of v1 - v2

Q: Equivalent dominant strategy under standard assumptions?

Yes, in theory but doesn’t happen in small-stakes lab experiments

  • And it can be shown for all cases not given here that b1 = v1 dominates
milgrom ii
Milgrom II
  • Why can we get sub-optimal allocation with first-price auctions?
    • Billhas $101 value on good, and knows Fredvalues good with 0.8 probability at $50 and 0.2 probability at $75
    • Billwill max P(winning)∙E(payout|winning) and it is never optimal to bid more than $62.
  • Comparison among auctions
    • There are theoretically efficient auctions for a myriad of institutional settings. However, auctions in the real-world are simple
    • In fixed-quantity environments, English outcry is most efficient. However, these require presence of bidders and 2nd-price sealed auctions can be corrupted.
  • Q: What is the main point of the paper? Can we rely on auctions to achieve efficient allocation of resources?
mcmillan i
McMillan I
  • How would the U.S. government assign spectrum rights no longer reserved by military?
    • Administrative assignment, lottery, auction, first-possession
    • Q: Why not assign by lottery or first-possession and allow trade?
  • Selling spectrum rights via auction.
    • Thousands of 10-year spectrum licenses to be sold circa 1994 to cell phone companies, cable TV companies etc.
    • Bidders face risks, but could make huge profits
    • FCC cares about revenue but also wants ownership by minorities and wants to limit negative publicity
  • How did game theorists inform the auction design?
mcmillan ii
McMillan II
  • Lessons learned from other spectrum-rights auctions
    • New Zealand 2nd-price debacle
      • 1 firm bids NZ$100,000 and pays 2nd-bid of NZ$6
      • Cellular licenses fetched NZ$36 million v. NZ$240 million estimate
      • Lessons: no reserve prices required, govt publicized 1st price
    • Australia 1st-price auction
      • UCom and Hi Vision won with high bids but neglected to pay
      • Lesson 1: there was no penalty for default to discipline bids so that bids conveyed no real information.
      • Lesson 2: Fine print matters – oversight in auction design will be exploited
mcmillan iii questions and solutions in u s auction design
McMillan III: Questions and solutions in U.S. auction design
  • Sealed-bid v. open auction
    • OA gives bidders more info, which reduces winner’s curse, and increases the bids of the risk averse but bidder collusion is easier in OA
    • Middle ground solution: use multiple rounds of sealed bids, announce leading bids but not bidder identity
  • Simultaneous v. sequential auction of all licenses
    • sequential is easier to understand and administer, but impedes aggregation of licenses
    • Solution was to allow simultaneous bidding over multiple licenses but create stopping points to prevent perpetual bidding
    • Withdrawal penalties were imposed
  • How should licenses be assigned to designated bidders
    • Use special auctions?
    • Subsidize the bids of designated bidders?
  • Q: Was economic theory needed or would untrained smart people give similar advice? Did lab experiments identify pitfalls? Why not use lotteries with ex post trade?