class16_asymmetricinfo_

class16_asymmetricinfo_ - Econ 51 Winter 2011 Class#16 PS#6...

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1 Econ 51, Winter 2011 Class #16 • PS #6 due Friday • Today: Talk about auctions, and move on to asymmetric information. Tuesday, March 1, 2011

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2 Game theory: Applications - Auctions Tuesday, March 1, 2011
3 Auctions Game theory Auctions are today a very common way to sell products (or buy services). Examples: Unique items, such as arts, antiques, and wine bottles are sold through auctions. The government sells oil drilling rights, and electromagnetic spectrum rights through auctions. The government uses auction to procure many services (road construction, forest services). Auction sights are common on the Internet, e.g. eBay , Amazon , and Yahoo! Online Ad auctions, e.g., google, Yahoo!, Microsoft Clearly, an auction is a strategic interaction: what I should bid depends on what I think the other participants would bid. Therefore, we should use game theory to analyze it. Tuesday, March 1, 2011

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The basic setup Game theory We have one object for sale. There are N potential buyers. Each buyer i submits a bid b i as a function of how much she likes the object. The auction rules specify which bidder will win the object and how much she will pay, given her bid and the bids of the other participants. For each set of rules, we may be interested in their properties: • What are the equilibrium bidding strategies? • Do we obtain efficiency? i.e. does the object go to the bidder who values it the most? If it doesn’t, we can transfer her the object for some price, and make everyone better off. • What are the expected payoffs for the seller?
5 Different types of auctions Game theory We will study different types of auctions: • First price sealed-bid auction : each bidder writes her bid, and the object goes to the highest bidder who pays the highest bid. • Second price sealed-bid auction : each bidder writes her bid, and the object goes to the highest bidder who pays the second highest bid. • English auction : bidders bid sequentially by increasing others’ bids until no bidder wants to increase the bid any longer; this bidder wins the object and pays her final bid. • Dutch auction : the price starts high and is decreased gradually. The winner is the first bidder who stops the countdown, and the price is the last price quoted. There are other types of auctions, which we will not study. For example, we can have an all-pay auction, in which all bidders pay, not only the winning bid. Or, we often observe auctions with secret reserve price: so even if you win, you may not get the object. Tuesday, March 1, 2011

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Valuation and information Game theory We will focus on two types of situations: Private value auction : bidder i knows exactly her valuation v i . Bidder
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class16_asymmetricinfo_ - Econ 51 Winter 2011 Class#16 PS#6...

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