lecture2 - Lecture 2 Auctions Auctions serve the dual...

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Lecture 2 Auctions Auctions serve the dual purpose of eliciting preferences and allocating resources between competing uses They are widely used by companies competing uses. They are widely used by companies, private individuals and government agencies to buy and sell commodities, in competitive contracting between an (auctioneer) firm and other (bidder) firms up or down the supply chain to reach trading agreements. Merger and acquisitions often have an auction flavor about them.
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APT and EMH are incomplete cha acte i ations of ma ket beha io characterizations of market behavior Both APT and EMH deal with inequalities that relate k t d t h th Th ti ll d ib market orders to each other. They partially describe how a well functioning limit order market works. But neither theory answers: 1. At what price should traders place their limit orders? 2 Should a market order or a limit order be placed? 2. 3. How are transaction prices related to the underlying valuations of traders who place the orders? Answering those three questions requires the theory to characterize how traders optimally set their buy and sell orders in equilibrium.
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Many auctions are examples of i l li i d k simple limit order markets In a first price sealed bid auction bidders place limit buy In a sealed bid auction, bidders place limit buy orders without seeing the book, and the auctioneer fills one of the limit orders with a market sell. In an English auction bidders place limit orders and the auctioneer fills one order with a market sell. In a Dutch auction, the auctioneer places limit sell orders until a bidder fills one of his orders with a market buy. Since an auction is the simplest form of a limit order market studying behavior in auctions is also a useful way market, studying behavior in auctions is also a useful way to learn how investors trade in limit order markets.
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Not all auctions are limit order markets In a second priced sealed bid auction, players simultaneously submit their bids the highest bidder simultaneously submit their bids, the highest bidder wins the auction, and pays the second highest bid. Ebay is not technically a second price sealed bid auction, but in practice most Ebay bids are sold to sniping bidders, who bid at the close out time so that no one can respond. Note also that the “Buy it now” part of Ebay is just Note also that the Buy it now part of Ebay is just a limit sell order, in this case the ask price until the bidding closes.
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Bidding strategies Does it matter what form the auction takes? Returning to basics, from SCM (45-970) a strategy is a complete description of instructions to be played throughout the game f f f The strategic form of a game is the set of alternative strategies to each player and their corresponding expected payoffs from following them.
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