lecture2_getting_started

lecture2_getting_started - Getting Started We seek a theory...

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Getting Started We seek a theory of bidding behavior in auctions. Our theory will attempt to explain how peoples’ bids are related to their individual valuations, or simply values, for the item being auctioned. In mathematical terminology, we want a mapping from values to bids . A person’s value is the hypothetical price at which she is indifferent between buying the item and not buying it. With this interpretation, the payoff someone gets from winning an item in an auction is the difference between her value and the actual price she pays for it. Rod Garratt ECON 177: Auction Theory With Experiments
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We cannot presume to know peoples’ values for items they bid on in auctions. An individual’s willingness to pay for something depends on. ... how much satisfaction or enjoyment she gets from consuming it instead of other things she could potentially consume in its place their wealth or disposable income These attributes are (typically) unobservable. We can’t proceed unless we know something about individual values. We assume that we know the range of possible values that people hold and the likelihood that someone’s value lies in any interval . Rod Garratt ECON 177: Auction Theory With Experiments
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Probability distribution function, F Let v i denote individual i ’s value From the point of view of the auctioneer, or other bidders, or an economist analyzing the auction, individual i’s value is a random variable ˜ v i The information the auctioneer has about the likelihood of different realizations of the random variable ˜ v i is summarized by the function F . For any value v , the number F ( v ) tells us probability that an individual has a value that is less than or equal to v . Rod Garratt ECON 177: Auction Theory With Experiments
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You can think of the function F as representing the distribution of types of people that exist in the population. F ( v ) is the fraction of the population with types less than v An individual shows up at an auction is a random draw from the population Hence, the likelihood that she has a value in any range is simply given by the fraction of the population that has values in that range. Rod Garratt
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This note was uploaded on 12/26/2011 for the course ECON 177 taught by Professor Garratt during the Fall '09 term at UCSB.

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lecture2_getting_started - Getting Started We seek a theory...

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