Auctions and dynamic pricing

When is the auction mechanism useful? We do not know the true value of the good or service on offer We do not know the true value of the good or service on offer We have a spot market We have a spot market We need to get rid of excess stock quickly We need to get rid of excess stock quickly

Taxonomy of auctions Single-sided: Single-sided: –English –Dutch –Japanese –Sealed bid Forward vs. reverse auctions Forward vs. reverse auctions

English Auctions Open cry Open cry Bidders call ascending prices Bidders call ascending prices Auction ends at a fixed time or when there are no more bids Auction ends at a fixed time or when there are no more bids Final (highest) bidder wins Final (highest) bidder wins

Dutch (“descending clock”) auctions Open cry Open cry Auctioneer calls out descending prices Auctioneer calls out descending prices First bidder to jump in gets the good at that price First bidder to jump in gets the good at that price When auctions involve multiple units: When auctions involve multiple units: –Bidders shout out a quantity (instead of an agreement to accept the single unit at the current price) –Remaining units continue to be auctioned –Clock (initial price) can reset to any value or continue to drop

Japanese Auctions (This name is not universally used) (This name is not universally used) Auctioneer calls out ascending prices Auctioneer calls out ascending prices Bidders are initially “in”, but may choose to irrevocably drop out at a certain price Bidders are initially “in”, but may choose to irrevocably drop out at a certain price Last bidder remaining gets the good Last bidder remaining gets the good Multi-unit version: Multi-unit version: –Bidders call out quantities instead of simple “in” or “out” –Quantities decrease between rounds –Auction ends when supply meets or exceeds demand

Sealed bid auctions Each bidder submits a sealed bid Each bidder submits a sealed bid Highest bidder wins, but at kth price (different choices of k give rise to different auction modes) Highest bidder wins, but at kth price (different choices of k give rise to different auction modes) Sealed bid auction modes: Sealed bid auction modes: –First price –Second price (also called Vickrey auctions) –Kth price “Strategy-proof” auctions: Vickrey auctions are strategy proof – the best strategy for a bidder is to bid his/her true valuation (i.e., no incentive to be dishonest) “Strategy-proof” auctions: Vickrey auctions are strategy proof – the best strategy for a bidder is to bid his/her true valuation (i.e., no incentive to be dishonest)

Reverse “buy-side” auctions English descending English descending Dutch ascending Dutch ascending Japanese descending Japanese descending