auction_lec

auction_lec - Auction Theory John Rust, Juan Diaz, Sung Jin...

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Unformatted text preview: Auction Theory John Rust, Juan Diaz, Sung Jin Cho University of Maryland <http://gemini.econ.umd.edu/jrust/econ306/auction.pdf> May 7, 2003 1 Limitations of Classical Models of Competitive Equilibrium One of the limitations of the the standard competitive model and classical general equilibrium theory is that the theory doesnt tell us much about how equilibrium prices are actually formed The theory is silent on how the economy actually gets to an equilibrium, and indeed, it does not describe out of equilibrium behavior The theory is also silent on various types of institutions used to form prices. Auctions, bargaining and search, posted prices, administered prices, and many other types of institutions are used in in the real world, and these institutions can affect the price formation process. 2 The Fiction of the Walrasian Auctioneer The typical story underlying the textbook model of competitive equilibrium is that there is a Walrasian auctioneer who calls out tentative prices. At these prices consumers and Frms are assumed to (truthfully) report that amount they would be willing to buy or sell. If there is excess demand in a market, the Walrasian auctioneer raises prices, if there is excess supply, the Walrasian auctioneer lowers prices This tentative price formation or tatonnement process (the rench word for groping) is supposed to eventually lead to a competitive equilibrium. At that point all trading, production, and consumption can occur. It is hard to think of any real world markets that operate this way. 3 How are Prices Determined in the Real World? As I noted above, in the real world prices are determined by a variety of mechanisms: Frms post prices, periodically holding sales if inventory is accumulating, or raising prices if there are stock-outs or if the Frms costs increase many commodities such as pork bellies, wheat futures, crude oil, etc. are trade in double auction markets such as the Chicago Board of Trade or the New York Mercantile exchange. Many of these markets are open outcry where traders call out offers to buy and sell many Fnancial securities are traded by spet market makers who set bid/ask spreads for stocks on the New York Stock Exchange, individual items such as paintings, and other type of art are often auctioned off at auction houses such as Sothebys or Christies. many less expensive items are sold in online auctions such as on Ebay. 4 Auctions for Single Items Economists have made the most progress in describing how prices are formed in auctions. Consider a person who wants to sell a single unique item to a group of potential buyers. A common way to sell the item is to hold an auction....
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auction_lec - Auction Theory John Rust, Juan Diaz, Sung Jin...

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