1 Types of Auctions English auction –ascending-price, open-outcry Dutch auction –descending-price, open-outcry 1 st price sealed bid auction –known as discriminatory auction when multiple items are being auctioned 2 nd price sealed bid or Vickrey auction –known as uniform-price auction...

2 General Remarks about Auction Complex auction strategies. –risk attitude, one or multiple items, private or common value, secret information, etc. The only piece of information available to all is the rules of an auction. Economists use the framework of game theory to study auction behavior.

3 Independent Private Values Common Values English = 2nd price Dutch = 1st price English > 2nd price Seller’s Expected Revenue (Risk Neutral Bidders) = <

4 Independent Private Values Common Values English = 2nd price Dutch = 1st price English > 2nd price Seller’s Expected Revenue (Risk Averse Bidders) < ?

5 Seller’s Auction Strategy Revealing information removes uncertainty –link the final price to outside indicators of value (an authoritative evaluation)

6 Buyer’s Bidding Strategy English auction –bid a small amount more until reaching the valuation, then stop Dutch auction –no “optimal” bidding strategies –decide in advance the maximum amount to bid (as in 1st sealed bid auction)

7 Buyer’s Bidding Strategy 1st price sealed bid auction –no “optimal” bidding strategies –tradeoff is between winning more often and benefiting more Vickrey auction –the dominant strategy is to submit a bid equal to the true reservation price

8 Bidder’s Winning Strategy Avoid pitfalls – winner’s curse Always bid cautiously –Don’t let the presence of several competing bidders push you into making too aggressive a bid.

9 You cannot make money if you are too cautious ? Milgrom (1989, JEP)... returns in bidding come from cost and information advantages,... bidders without some advantage have little hope of earning much profit, but could with a little bit of carelessness suffer large losses.

10 Auction in Electronic Marketplace Seller controlled marketplace –vendor web sites with auction Buyer controlled marketplace –web site procurement posting –purchasing agents –purchasing aggregators Neutral marketplace

11 Role of Neutral Intermediary Advantage of scale of transaction processing –may act as service bureaus –collect valuable selling/buying information How to provide more value to sellers and buyers