25-Auctions (II)

25-Auctions(II) - Agenda Course Overview Bidding in a Second-Price Auction Revenue Equivalence Common value auctions The winners curse Auction

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1 Agenda Course Overview Bidding in a Second-Price Auction Revenue Equivalence Common value auctions The winner’s curse Auction Design What To Take Away Managerial Economics The Structure of the Course Consumers and Producers Market Structure Uncertainty Perfect competition Monopoly Oligopoly Auctions Asymmetric Information Strategy Introduction to markets Today’s lecture Consumer choice Technology and Production
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2 Agenda Course Overview Bidding in a Second-Price Auction Revenue Equivalence Common value auctions The winner’s curse Auction Design What To Take Away Bidder strategies under a 2 nd price Auction Last lecture we analyzed the behavior of bidders in a private value auction that used a sealed-bid first-price format. We concluded that bidders will underbid relative to their valuations. Now let’s change the rules and suppose that the good is given to the highest bidder who pays in exchange a price equal to the second-highest bid . Suppose that one bidder’s valuation is v . She is of course uncertain of the valuations of competing bidders. How should the bidder bid? We will show that bidding your own valuation (“bidding truthfully”) is actually a (weakly) dominant strategy.
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3 Bidder strategies under a 2 nd price Auction Suppose that you are bidding your valuation. Can you profit from raising your bid? Suppose that all other bids are below your valuation. Then raising your bid doesn’t change the fact that you win and doesn’t change how much you pay (the second highest bid). Suppose that there is one bid that is above your valuation and you outbid that bid. Then now you win and you pay more than your valuation! Can you profit from lowering your bid? Suppose that there is at least one bid above your valuation. Then by lowering your bid you still don’t win. Suppose that all bids are below your valuation. If you bid your valuation you get the good and obtain a positive payoff. If you bid lower than the next highest bid then you lose the good and get a zero payoff! How can it be that bidders will bid truthfully? In a second-price auction, conditional on winning, the amount you pay does not depend on your bid. As a result, shading your bid can only affect whether you win the object but not the price you pay if you win. English (oral) Auctions In English auctions bidders submit bids above the current prevailing bid until the auctioneer ends the auction and allocates the good to the highest bidder at that time who pays her bid. How would you bid? First you would stop bidding once the current bid is at or above your valuation. If you increase your bid you risk the possibility that you would win and thus pay more for the good than your valuation.
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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25-Auctions(II) - Agenda Course Overview Bidding in a Second-Price Auction Revenue Equivalence Common value auctions The winners curse Auction

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