key ideas and lessons learned Peter Bardsley auctions: theory, evidence, policy

our objective our objective was to illustrate some basic effects that are basic to all auction design problems bidder behaviour is influenced by auction design and the auction environment auction performance (revenue) is influenced by auction design and the auction environment the link between the two is more subtle than you might expect

behaviour auction design, and the auction environment, affect bidder behaviour bidders bid more aggressively –if there are more bidders –in a second price auction than in a first price auction the second price auction is strategically equivalent to the English auction the effect of second order effects like risk aversion is more subtle we expect risk aversion to push up bids in an English auction but not in a closed bid auction there are other effects, that we have not discussed, that can affect the English auction that’s theory. It’s prudent to check how it actually works out in the lab.

value bid 1 st price, Dutch bid curves – different formats n bidders 2 nd price, English

value bid bid curves – more bidders N bidders 2 nd price, English 1 st price, Dutch

revenue - 1 changing the auction format from 1 st to 2 nd price (or Dutch to English) leads to more aggressive bidding but to a first approximation, revenue does not change

value bid 1 st price

value bid 1 st price 2 nd price

value bid 1 st price 2 nd price

value bid 1 st price 2 nd price revenue equivalence

revenue - 2 increasing the number of bidders always increases revenue we illustrate with a 1 st price auction –2 nd price is similar

value bid 1 st price bid curve n bidders

value bid 1 st price more bidders – expected highest value goes up N bidders

value bid 1 st price more bidders – bidders bid more aggressively N bidders

what we have not covered auction theory is complicated. Here are some of the things we have not covered: –common value environments and the winner’s curse –selling or buying multiple objects either identical or combinatorial –reserve prices, entry fees,... –asymmetric bidders –collusion –the interplay between auction theory, contract theory, and negotiation it is not because we have nothing to say on these subjects –in fact we know a great deal about all of them the basic principles that we have introduced apply in these more complex environments –but there are new subtleties, new complexities

the bottom line intuition can be misleading theory can be misleading experiments without theory are blind improvisation without either is, well, courageous there are enormous gains to be had from good institutional design –let’s do it properly