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Different types of auctions such as English and Dutch auctions, sealed bid auctions, and models of bidders' valuations. It also discusses the winner's curse and optimal bidding strategies for different types of auctions. useful for students studying economics and business who want to understand the theory behind auctions and how to bid optimally in different auction settings.
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Lecture 5 MANAGERIAL AND DECISION ECONOMICS AUCTIONS
Hence formally, estimated value of each bidder is
where v is the true, common value and e_i is the ‘error term’ associated with the bidder i ’s estimate. If each bidder bids their estimated value, the person with the highest value of e_i (e_max) wins the auction. However, if e_max>0 , the bidder pays more than the value of the good. They are likely to have over-estimated the value. This is the winner’s curse!
- How to overcome it? Theoretical research on auctions has shown that the expected value of true valuation given your signal is the highest signal is a decreasing function of auction size (number of participants). where d(N) is a discount factor for auction’s size. d(1)=1 and d(N) decreases as N increases. - The larger the value of N the greater is the likelihood that e_i being the highest signal v+e_i represents an overvaluation of v+e_i_._ HENCE: the optimal strategy in a common value model is to bid less than your estimated value. The more bidders there are, the lower your bid should be. OPTIMAL BIDDING STRATEGIES: I. English (ascending bid) auction A bidder’s optimal strategy is to continue to bid for as long as the price is below their private value, and to withdraw as soon as the price equals or exceeds this private value. - i.e. if another bidder is offering a price below that of your private value, you lose nothing by entering a revised bid. II. Second price (sealed bid) auction A bidder’s optimal strategy is to enter a bid equivalent to his or her own private value. In both an English auction and a second price auction, it pays to tell the truth. At the dominant strategy equilibrium, the outcomes of the English and second price sealed bid auction are the same. The bidder with the highest private value always wins, and always pays a price equal to the second-highest bidder’s private value.