Midterm Study guide econ 115.pdf

# Revenue equivalence principle asserts that the

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Revenue equivalence principle asserts that the revenues will be the same if averaged across a large number of such auctions The revenue equivalence principle does not hold in experiments. The revenues can be ranked approximately as follows: Exotic auctions (All-pay, pay-to-bid) >First price > Dutch <> Second-Price > English Standard models w/private values The NE outcomes in the first-price and Dutch auctions should be the same The dominant strategy equilibria outcomes in the second-price and English auctions should be the same if the values are private The average revenues should be the same in all of these actions if the values are private ( revenue equivalence principle) The winner should be the bidder w/the highest private value ( Pareto Efficiency) Lecture 22 Interdependent values -reservation values are called interdependent if the value Vi of agent i can be affected by the value Vi of agent j. -This is plausible if bidders: Plan to resell the good later Believe that other bidders are better informed about the quality of the good Care about fashion Interdependent and Common Values

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-values can be correlated (interdependent) or in the extreme case, the same (common) , but not known precisely at the time of the auction -ex. A jar with coins, mineral rights -winner’s curse : the winner can end up paying more than the value that they get from the object -it can persist even on average -ex. Imagine there is an auction for a jar; winner is likely to overpay bc high bid may be due to unrealistic (irrational) expectations rather than intrinsic value of the coins Winner’s curse: theory -in order to avoid winner’s curse, agents need to revise bidding strategies and bid less (that is called shading) -winning the auction is a negative signal: means other bidders have relatively low values -game theory predicts bidders should revise their strategies accordingly so that on avg, winners still get positive utility -Empirical evidence: baseball teams overpay for star players (on avg) -Winner’s curse is persistent in experiments -avg earnings are negative in auctions w/common values V and signals V + e where the error ei has some distr. b/t [-1,1] -bidders learn very slowly, some go bust and lose all of their endowments in experiments -the # of agents makes the problems even worse Case Study -Ebay auctions are similar to second-price auctions -each participant submits a bid and pays the second highest bid -theory suggests if all values are private, then each bidder will make a single bid equal to the value -This is a dominant strategy -People typically: Bid more than once Make most bids in a very short time before the auction ends (called sniping) 3rd party sniping services auto. Place bids the last few seconds of auctions Sniping in online auctions Sniping is the tendency to make bids at the last seconds of an online auction -amazon auctions add 10 seconds after each bid (no sniping really) Sniping more common in ebay Explanations:
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• Spring '07
• wrigley
• Game Theory, Auction, Nash, Dominant strategy, auctions

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