Exploring Auction Theory: Strategies and Applications

1. welcome and introduction auctions: theory, evidence, policy Peter Bardsley

2. this workshop • second in a series of workshops prepared by the University of Melbourne for the VPS • part of an ongoing capacity building partnership • level is intermediate • participation in previous workshop is desirable but not essential • we are aware that the audience is very mixed • if it starts to look complicated, hang in there – there will be something for everybody

3. the objectives • to introduce and illustrate some of the basic ideas of auction theory • to show how these ideas can be tested, explored and refined in the laboratory • to show how these ideas are applied to policy design • to work in the simplest possible environment to illustrate these concepts • independent private values model • more complex environments (common values, asymmetric bidders, multiple objects, combinatorial and package auctions) will be mentioned briefly

4. buying or selling? • auctions can be used to sell something, or to buy something • procurement auctions, sometimes called reverse auctions • the theory is completely symmetrical • we will usually talk about selling objects • the application to procurement auctions is immediate: just change some words around

5. what do we want allocation mechanisms to achieve? • match buyers and sellers • price discovery / terms of trade • efficient allocation of resources • voluntary exchange makes both parties better off • are their any gains from trade that are missed? • is there any money left lying on the table? • speed, efficiency, transparency, low transaction costs • maximal revenue, if we are selling; minimal cost, if we are buying • robustness: the mechanism should work well in a range of environments

6. a variety of mechanisms • beauty parades, negotiated deals • unstructured pit markets • village market • some stock exchanges • intermediated markets • intermediary holds inventory, bears risk, stands between buyer and seller • stock exchange specialists, supermarkets, used car dealers • posted price markets • most shops • Sydney versus Melbourne house market • search markets • haggling in bazaars • job markets (executives, plumbers, ...) • auctions of many forms

7. why study auctions? • wide range of design choices • tend to be highly efficient • well suited to situations with a single seller or a single buyer • can be shown to be optimal in many environments

8. first reactions • what strategies did you follow when you were bidding? • what strategies do you think other people were following? • should you reveal your private information? • should you bid your full value? • can you rely on others being truthful? • which institutions are more profitable for the auctioneer?

9. how to get the most out of this workshop:three key questions • how does auction design affect behaviour? • how aggressively do participants bid? • how does auction design affect performance? • revenue raise • efficiency of allocation • when are apparently different institutions actually very similar? • when are apparently similar institutions actually very different?