2. Games People Play. 12: Auctions

3. Games People Play. Auctions In this section we shall learn How different types of auctions allocate goods How to buy goods in auctions How to sell goods at auctions Strategies, legal or otherwise, to improve your outcome from an auction

4. Games People Play. Types of Auction Ascending or descending Open outcry or sealed bid First or second price or another Winner pays, all pay or some other system Common-value Private value

5. Games People Play. Types of auction In an ascending auction prices rises and stop when nobody further wishes to bid. In a descending auction price decreases in and stops as soon as anyone bids.

6. Games People Play. Don’t worry Ali The stupid Americans will never find our weapons of mass destruction!!!

7. Games People Play. Let’s make a deal!! Each of you will be given a number of M&M ’ s to bid for a desirable object If you win the auction you keep the object and any M&M ’ s you have left over English Auction Open outcry Ascending Highest bid is paid Dutch Auction Open outcry Descending Highest bid is paid

8. Dave Dollars Games People Play.

9. Types of auction Open outcry or sealed bid In an open outcry auction bids are called out for all to hear In a sealed bid auction bids are sealed in envelopes and only the auctioneer sees them

10. Games People Play. Types of auction First price The highest bidder pays their own bid Second price or Vickrey The highest bidder pays the price bid by the highest losing bidder

11. Games People Play. Um…Umm..It’s so hardI think…no..I’m not sure Now it’s getting even harder Oh but I think I choose Bachelorette number 2

12. Games People Play. Let’s make another deal!! Each of you will be given a number of M&M ’ s to bid for a desirable object If you win the auction you keep the object and any M&M ’ s you have left over Vickrey Auction Sealed bid Ascending 2 nd Highest bid is paid

13. Games People Play. Types of auction Winner pays Only the winner pays All pay Everyone that bids pay some fraction of their bid even if they don’t win

14. Games People Play. At least I still have my virgins You know Ali being a dictator isn’t as much fun as it used to be!!

15. Games People Play. Boy have I got a deal for you!! Each group has to bid for an object If you win the auction you keep the object and pay nothing If you lose the auction you pay whatever you bid

16. Games People Play. Types of auction All pay These are very common Political race Sports contest Competition for promotion in a firm. Each competitor bids Raises funds Trains and misses income from other work Does unpaid overtime. Only one player gets the object Wins the election Wins the race Gains promotion.

17. Games People Play. Types of auction Common value The value of the object is the same for all bidders But each bidder only has an imprecise estimate of the valueExamples: You buy a Rembrandt anticipating reselling it at a profit You buy an oil field lease but don’t know exactly the size of the oil reserve

18. Games People Play.

19. Mega-Lo-Mart You are a corporate raider and are considering making a take-over bid for Mega-Lo-Mart. Mega-Lo-Mart is worth between $0 and $10 billion The true value is known by the current management You only know that Mega-Lo-Mart are worth between $0 and $10 billion with each possible value being equally likely. If you take over you will run the company better and its value will increase by 50% What do you bid? $5 Billion Yep!!

20. Games People Play. Mega-Lo-Mart The expected value of Mega-Lo-Mart is $5 billion under the current management and $7.5 after your take-over. Any bid between $5 and $7.5 should then be profitable. Offer b If the current value of the company is less than b your offer is accepted The you can expect the current value of the company to be b/2 if you win. So the company is expected to be worth in your hands (1.5)(b/2) = 0.75b < b!! This is the Winners Curse

21. Games People Play. The Winners Curse Watch the BBC America TV show “Location, Location, Location” Observe sealed bid property auctions that the “experts” claim to always win!! See “experts” incur the Winners Curse!!

22. Games People Play. The Winners Curse

23. Games People Play. Types of auction Private value The object has different values to different people Bidders know their own values but not the values of others Example: A “Little Michael Jackson” doll is up for auction, some loath and others love the little scamp!!

24. Games People Play. Bidding strategies Depend on the type of auction English auction (ascending, open outcry, first price) If your valuation is V bit ε above the previous highest bid as long as the bid is less than V. Highest valuation wins auction – efficiency Winning bid = second highest valuation First price sealed bid If you bid V and you are the highest bidder you will have paid more the you need to Shade your bid to trade off the probability of losing the object against the gain from paying a lower price Dutch auction (descending, open outcry, first (only) price) Price drops automatically, first to say stop wins the object at that price. Shade your bid, wait a little after the price has fallen below V, trade off the chance of losing against the reduced price

25. Games People Play. How not to bid at an auction

26. Games People Play. Inefficiencies Arise when A mutually advantageous trade fails to materialize The sale price is above the buyers reservation price or below the sellers reservation price First-price auction First-price auction Highest valuation may be higher than seller’s value But: bid-shading results in lower bid Second-price auction Highest valuation may be higher than seller’s value But: second-highest value, which determines the price, might not be

27. Games People Play. Selling at auction The seller can choose The auction type Must trade off bid shading (Dutch, First Price Sealed Bid, All Pay) against lower unshaded sales prices (English, Second Price Sealed Bid) A reserve price to put on the object Choice depends on beliefs about the distribution of sellers valuations

28. Games People Play. Manipulating auction outcomes Strategies available to sellers Second price auctions A “phantom bid” may be placed after the seller knows the other bids Place a bid just below the highest bid Essentially: makes a second-price auction a first-price auction English Auction: “plants” fake bidders to drive up the price

29. Games People Play. Manipulating auction outcomes Strategies available to buyers Cast doubt on objects value Reduces others bids in both second and first price auctions. Collusion Form bidding rings Need to stop ring members cheating on each other Agree to hold secondary auction after the object is obtained and split the difference between winning bids in first and second auctions Rotation of winning bids