Lecture - IT and Markets (Auctions) & Financial Markets

Lecture - IT and Markets (Auctions) & Financial...

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Unformatted text preview: Prof. Don Riley What is a market mechanism? A Mechanism in which exchange takes place. The type of market mechanism determines the outcomes (e.g. prices.). o Low priced products o Products where buyers buy bigger quantities o Demand is relatively stable Posted Price Mechanism Prices are pre-determined. Posted Price Mechanism does not perform price discovery Posted Price Mechanism is well-suited for. Google/Yahoos primary revenue model? Sponsored Search Auctions . The hottest tech IPO in years will be run as a "Dutch Auction.- April 29, 2004: CNN/Money From Wall Street 07/21/2006: Under the repurchase plan, Microsoft will buy back up to 808 million shares, or about 8.1% of its common shares outstanding. The buyback will be a Dutch auction. FCC (Federal Communication Commission) sells spectrum using an Auction Mechanism US Treasury sells Treasury Bills and Bonds using an Auction Mechanism! The NYSE uses an Auction Mechanism! A market mechanism with an explicit set of rules determining resource allocation and prices on the basis of bids from the market participants. How one man swapped a paper clip for a house!!! http://Oneredpaperclip.com by Kyle MacDonald $28,000 !!! http://www.whattheheck.com/ebay/ $15,400 !!! o Most open and objective assessment method o Auctions are transparent o Criteria (Rules) specified in advance o Reason for assignment is publicly observable o Prices are publicly and transparently determined by competition o Pure market mechanism o Promotes efficient allocation o Simplicity; Can be automated o Helps allocate resources quickly o Useful in the context of incomplete information o When not much info. is available about the value distribution of buyers. o Excellent Price Discovery Mechanism Going once, going twice, ... 480 B.C. Herodotus reports on marriage auctions in Babylon 200 A.D. Romans auctioned prisoners of war and war booty. 193 A.D. Entire Rome was auctioned to Julianus. Remember: NETWORK EFFECTS! Online auctions overcome several of the limitations of traditional auctions o Geographic and Temporal Constraints o Synchronous Bidding o Traditional auctions require bidders to participate at the same time o Online auctions typically have asynchronous bidding o Provides bidders more flexibility to submit bids o The ability to gather a large group of bidders. Drawbacks of online auctions o Difficult for bidders to inspect goods before bidding o Potential for fraud o Determines the efficiency of allocation. o Determines revenue and profitability. o Affects other public policy objectives such as promoting new entry and competition. Auctions Open Sealed-Bid First Price Second Price Descending Ascending English Auction Dutch Auction Vickrey Auction English Auctions Most popular format One-sided auction Open-outcry Bidding Begins low Begins with the reserve price Ascending-bid auction Buyers call out bids to beat current price...
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Lecture - IT and Markets (Auctions) & Financial...

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