Games People Play. 12: Auctions Games People Play. Auctions In this section we shall learn How...

Games People Play.Games People Play.

12: Auctions12: Auctions


Auctions Auctions

In this section we shall learnIn this section we shall learnHow different types of auctions allocate goods

How to buy goods in auctions

How to sell goods at auctions

Strategies, legal or otherwise, to improve your outcome from an auction


Types of AuctionTypes of Auction

Ascending or descending Ascending or descending

Open outcry or sealed bidOpen outcry or sealed bid

First or second price or another First or second price or another

Winner pays, all pay or some other systemWinner pays, all pay or some other system

Common-valueCommon-value

Private valuePrivate value


Types of auctionTypes of auction

In an ascending auction prices rises and In an ascending auction prices rises and stop when nobody further wishes to bid.stop when nobody further wishes to bid.

In a descending auction price decreases in In a descending auction price decreases in and stops as soon as anyone bids.and stops as soon as anyone bids.


DonDon’’t worry Alit worry AliThe stupid Americans will never find our

weapons of mass destruction!!!


LetLet’’s make a deal!!s make a deal!!

Each of you will be given a number of M&MEach of you will be given a number of M&M’’s to bid for a s to bid for a desirable objectdesirable object

If you win the auction you keep the object and any M&MIf you win the auction you keep the object and any M&M’’s s you have left overyou have left over

English Auction English Auction Open outcry AscendingHighest bid is paid

Dutch Auction Dutch Auction Open outcry DescendingHighest bid is paid

Dave DollarsDave Dollars




Open outcry or sealed bidOpen outcry or sealed bidIn an open outcry auction bids are called out for all to hear

In a sealed bid auction bids are sealed in envelopes and only the auctioneer sees them



First priceFirst priceThe highest bidder pays their own bid

Second price or VickreySecond price or VickreyThe highest bidder pays the price bid by the highest losing bidder


Um…Umm..It’s so hardI think…no ..I’m not sureNow it’s getting even

harderOh but I think I choose

Bachelorette number 2


LetLet’’s make another deal!!s make another deal!!

Each of you will be given a number of M&MEach of you will be given a number of M&M’’s to bid for a s to bid for a desirable objectdesirable object

If you win the auction you keep the object and any M&MIf you win the auction you keep the object and any M&M’’s s you have left overyou have left over

Vickrey Auction Vickrey Auction Sealed bid Ascending

2nd Highest bid is paid



Winner paysWinner paysOnly the winner pays

All payAll payEveryone that bids pay some fraction of their bid even if they don’t win


At least I still have my virgins

You know Ali being a dictator isn’t as much fun as it used to be!!


Boy have I got a deal for you!!Boy have I got a deal for you!!

Each group has to bid for an object Each group has to bid for an object

If you win the auction you keep the object and If you win the auction you keep the object and pay nothingpay nothing

If you lose the auction you pay whatever you bidIf you lose the auction you pay whatever you bid



All payAll payThese are very common

Political raceSports contest Competition for promotion in a firm.

Each competitor bidsRaises fundsTrains and misses income from other workDoes unpaid overtime.

Only one player gets the object Wins the electionWins the raceGains promotion.



Common valueCommon valueThe value of the object is the same for all bidders

But each bidder only has an imprecise estimate of the value

Examples:Examples:

You buy a Rembrandt anticipating reselling it at a profit

You buy an oil field lease but don’t know exactly the size of the oil reserve


Mega-Lo-MartMega-Lo-Mart

You are a corporate raider and are You are a corporate raider and are considering making a take-over bid for considering making a take-over bid for Mega-Lo-Mart .Mega-Lo-Mart .

Mega-Lo-Mart is worth between $0 and Mega-Lo-Mart is worth between $0 and $10 billion $10 billion

The true value is known by the current The true value is known by the current managementmanagement

You only know that Mega-Lo-Mart are You only know that Mega-Lo-Mart are worth between $0 and $10 billion with worth between $0 and $10 billion with each possible value being equally likely.each possible value being equally likely.

If you take over you will run the company If you take over you will run the company better and its value will increase by 50%better and its value will increase by 50%

What do you bid?What do you bid?

$5 Billion$5 Billion

Yep!!Yep!!


Mega-Lo-MartMega-Lo-MartThe expected value of Mega-Lo-Mart is $5 The expected value of Mega-Lo-Mart is $5 billion under the current management and $7.5 billion under the current management and $7.5 after your take-over.after your take-over.Any bid between $5 and $7.5 should then be Any bid between $5 and $7.5 should then be profitable.profitable.Offer b Offer b If the current value of the company is less than If the current value of the company is less than b your offer is acceptedb your offer is acceptedThe you can expect the current value of the The you can expect the current value of the company to be b/2 if you win.company to be b/2 if you win.So the company is expected to be worth in your So the company is expected to be worth in your hands hands

(1.5)(b/2) = 0.75b < b!!(1.5)(b/2) = 0.75b < b!!

This is the Winners CurseThis is the Winners Curse


The Winners CurseThe Winners Curse

Watch the BBC America TV show Watch the BBC America TV show ““Location, Location, LocationLocation, Location, Location””

Observe sealed bid property auctions that the Observe sealed bid property auctions that the ““expertsexperts”” claim to claim to always win!!always win!!

See See ““expertsexperts”” incur the Winners Curse!! incur the Winners Curse!!


The Winners CurseThe Winners Curse



Private valuePrivate valueThe object has different values to different people

Bidders know their own values but not the values of others

Example: A “Little Michael Jackson” doll is up for auction, some loath and others love the little scamp!!


Bidding strategiesBidding strategiesDepend on the type of auctionDepend on the type of auction

English auction (ascending, open outcry, first price)If your valuation is V bit ε above the previous highest bid as long as the bid is less than V.Highest valuation wins auction – efficiencyWinning bid = second highest valuation

First price sealed bidIf you bid V and you are the highest bidder you will have paid more the you need toShade your bid to trade off the probability of losing the object against the gain from paying a lower price

Dutch auction (descending, open outcry, first (only) price)Price drops automatically, first to say stop wins the object at that price.Shade your bid, wait a little after the price has fallen below V, trade off the chance of losing against the reduced price


How not to bid at an auctionHow not to bid at an auction


InefficienciesInefficienciesArise when Arise when

A mutually advantageous trade fails to materialize

The sale price is above the buyers reservation price or below the sellers reservation price

First-price auctionFirst-price auctionHighest valuation may be higher than seller’s value

But: bid-shading results in lower bid

Second-price auctionSecond-price auctionHighest valuation may be higher than seller’s value

But: second-highest value, which determines the price, might not be


Selling at auctionSelling at auction

The seller can chooseThe seller can chooseThe auction type

Must trade off bid shading (Dutch, First Price Sealed Bid, All Pay) against lower unshaded sales prices (English, Second Price Sealed Bid)

A reserve price to put on the object

Choice depends on beliefs about the distribution Choice depends on beliefs about the distribution of sellers valuationsof sellers valuations


Manipulating auction outcomesManipulating auction outcomes

Strategies available to sellersStrategies available to sellersSecond price auctions

A “phantom bid” may be placed after the seller knows the other bids

Place a bid just below the highest bid

Essentially: makes a second-price auction a first-price auction

English Auction: “plants” fake bidders to drive up the price


Manipulating auction outcomesManipulating auction outcomes

Strategies available to buyersStrategies available to buyersCast doubt on objects value

Reduces others bids in both second and first price auctions.

Collusion Form bidding rings

Need to stop ring members cheating on each otherAgree to hold secondary auction after the object is obtained and split the difference between winning bids in first and second auctions

Rotation of winning bids

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