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Unformatted text preview: Winner’s Curse Robert Wilson introduced us to this phenomenon in the 1970s. He had sat in at a meeting of executives at a major oil company. The government runs Mineral Lease Auctions, or auctions to sell temporary rights to extract certain resources. Among these Mineral Lease Auctions are what are called Outer Continental Shelf oil lease auctions. These auctions are set up as Vickrey style auctions, with the government setting up some minimum bid. The oil company was participating in one of these auctions, trying to determine their bid. The company’s geologists had been hard at work trying to determine the value of the oil they could extract under the lease. One of the geologists presented their findings placing a dollar estimate on the value of the lease. Immediately the executives started talking about how much to bid, and finally decided to bid a small fraction of the estimated value. Wilson immediately questioned them “Why wouldn’t you bid the estimated value? This is a Vickrey auction, the dominant strategy is to bid your value.” The answer to this question was that businesses who bid their estimated value go broke. A common value auction is one in which everyone who could possibly bid will derive the same value for the item. An oil lease auction is a good example. No matter who wins the lease, they will derive the same profit from drilling and extracting oil. If everyone has the same value for the item, and everyone knows what that value is, everyone will bid the same amount and we shall have a hard time deciding who wins. Alternatively, if no one knows the value of the item up for bid, everyone must make their best guess as to the value of the item with some level of error. Then the individual with the highest bid will win the item. In our set up, each of you is given an unbiased estimate of the true value of winning the auction. Unbiased means that, on average it will be correct. But, the value we have given you has some error in it. In particular we have drawn (in our case without replacement) the value from a uniform distribution over [ ] 10, 10 x x- + where x is the value of winning. We have used a Vickrey auction in conjunction with the common value auction. Because we drew without replacement, each possible value estimate could only be given to one individual. In general this can be done with replacement for a game that might more closely represent reality. with replacement for a game that might more closely represent reality....
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- Fall '08
- Auction, Vickrey, Common value auction