Lab7 - Private Value Auctions Econ 333 Fall 2009 Auctions...

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Private Value Auctions Econ 333 Fall 2009
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Auctions Auctions are most useful in selling a commodity of undetermined value. If a seller is unsure of the price he can get then auctions are particularly useful. More flexible than setting a fixed price Less time-consuming and less expensive than negotiating a price An auction tries to deliver the object to the person who values it the most .
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History of auctions Auctions extend back to 500BC in Babylon when Herodotus reported the use of an auction Women sold under condition they be married after purchase Less attractive women had to pay a dowry (negative price) Roman empire used auctions to liquidate property and sell goods acquired “sub hasia” (under the spear)
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Roman empire for sale 193 AD entire Roman empire was auctioned off by Praetorian Guard They killed Pertinax (emperor) and announced that highest bidder could have the empire! Didius Julianus outbid others to become emperor 6250 drachmas per Guard Beheaded 2 months later when Septimus Severus conquered Rome Winner’s curse???
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History of auctions Earliest modern recording of an auction in Oxford English Dictionary 1595 Auctions probably preceded this date Popular in late 17 th century 18 th century – London auction houses Sotheby’s 1744 Christie’s 1766 USA – liquidate estates, slave auctions eBay
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Value of the good Two types of values 1. Private value Each bidder has his/her own unique value for the item, e.g. art auction Nothing about the other bidder’s affects your value : (But may affect your bid , depending upon institution) What they know What they are WTP Source of uncertainty: others’ bids and values Others’ bids may determine own bid
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Value of the good Types of value (cont.) 2. Common value Value is the same for all bidders, but that value is unknown at time of bidding Each bidder only has an estimate of the value e.g. leases for unproven oil fields Source of uncertainty: value of object (& others’ bids)
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Types of auctions One-sided auctions Only one side of the market is active, usually buyers bidding (and no seller asks) e.g. English auction, Dutch auction Two-sided auctions Both sides of the market are active
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Number of units sold Single unit auctions Multi-unit auctions Typically have more complex bidding strategies
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Auction Institution Who proposes price? Bidding Process Description English Auctioneer Bids increase Price raised until bidding stops Dutch Clock Bids decrease Price lowered sequentially until sale confirmed by 1st bidder to accept price 1st Price Sealed Bid Buyer Sealed bid High bidder wins, pays own price 2nd Price Sealed Bid Buyer Sealed bid High bidder wins, pays 2nd highest price The 2 nd price sealed bid auction is often referred to as a Vickrey Auction . Open outcry
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Lab7 - Private Value Auctions Econ 333 Fall 2009 Auctions...

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