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Slides_class10 - Managerial Economics Class 10 1 Auctions 1 2 3 Sealed bid and open First-price and second price Private value and common value

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Managerial Economics – Class 10 1. Auctions 1. Sealed bid and open 2. First-price and second price 3. Private value and common value 2. Analysis of auctions 1. Revenue and auction design 2. Number of bidders 3. Winner’s curse
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What is an auction? Definition: A market institution with rules that determine the allocation of resources on the basis of bids from participants Over 30% of US GDP moves through auctions: Wine Art Flowers Fish Electric power Treasury bills IPOs Emissions permits Radio spectrum Import quotas Mineral rights Procurement
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Overview of auctions Auctions can be a tricky business There are different auction mechanisms Sealed vs. open auctions First vs. second price auctions There are different types and sources of uncertainty Private vs. common value auctions The winner’s curse
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Basic types of auctions Open auctions (sequential) English auctions iterative process of adjusting price upwards, e.g., “open outcry” auctions Dutch auctions auctioneer begins with a high asking price and lowers it until someone indicates acceptance Sealed auctions (simultaneous) First-price sealed bid Highest bid wins, payment = highest bid Second-price sealed bid Highest bid wins, payment= second highest bid
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Sources of uncertainty Private value auction Each bidder knows his or her value for the object Bidders differ in their values for the object Example include items strictly for personal consumption (a non-transferable, non-refundable airline ticket) Common value auction The item has a single though unknown value Bidders differ in their estimates of the true value of the object Examples include FCC spectrum, drilling rights, etc.
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First-price auction strategy The auction mechanism is easy to understand However, best bidding strategy is not so clear If you bid your valuation and win – no surplus Lower your bid below your valuation Smaller chance of winning, but win at a lower price Bid shading Depends on the number of bidders Depends on your information Optimal bidding strategy is complicated!
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Second-price auction strategy What about second-price auctions? How would you bid in this case? $700 $400 $500 $300 WINNER! Pays $500
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Optimal bidding strategy Bidding strategy is clear Bidding one’s true valuation is a dominant strategy You  Lose You  Win higher Your bid Others’ bids Your value
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Would you bid higher than valuation? Case 1 Case 2 Case 3 No difference No difference Lose money
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Case 1
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This note was uploaded on 04/30/2011 for the course MBA 862 taught by Professor Phi during the Fall '11 term at Clemson.

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Slides_class10 - Managerial Economics Class 10 1 Auctions 1 2 3 Sealed bid and open First-price and second price Private value and common value

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