# Liz DiMascio Paige Warren- Shriner Mitch Justus DUTCH AND ENGLISH AUCTIONS IN RELATION TO THE TULIP MARKET.

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Liz DiMascio Paige Warren- Shriner Mitch Justus DUTCH AND ENGLISH AUCTIONS IN RELATION TO THE TULIP MARKET

 High initial starting price—price lowers until acceptable to a bidder  Strategically equivalent to first-price sealed bid auctions  Dutch flower auction takes place every weekday in Aalsmeer, Netherlands  Retail flower salesman are participants  Frequently used in auctions for nondurable non-consumer goods DUTCH AUCTIONS

 Sequential  Bidders are purchasing goods for resale  Identical goods, identical bidders  Same number of goods each round  Independent Private Values (IPV): has a different value for each bidder (= Revenue – IP Cost) TYPICAL FEATURES OF NONDURABLE GOODS AUCTIONS

 “Why Do We Use the Dutch Auction to Sell Flowers? —Information Disclosure in Sequential Auctions” (Tu)  Given several simplifying assumptions, Dutch auction with only winning bid announced produces higher revenue than English auction in a sequential environment PRIVATE VALUE LITERATURE

 Bidders bid symmetrically according to bid function B(v)  In second round, winner believes that loser’s value lies in interval [0,v) where v is winner’s value  Loser calculates second bid based on first, losing bid  B(v) for first round = v/2  First stage winner randomizes over (v/2, 3v/4)  Loser will not bid if v < v’/4, where v’ is inferred valuation of first stage winner  In second stage, winner and loser are brought to relatively level playing ground (since loser of first round has informational advantage, while winner randomizes) DUTCH AUCTION WITH WINNER’S BID REVEALED

 Common Value Good: has one true underlying value for all bidders. This value is unknown at the time the bid is placed, and bidders receive independent signals of it. Values are influenced by others’ signals.  Private Value Good: has a different value for each bidder  Usually used to describe modern day auctions of nondurable non- consumer goods PRIVATE VALUE VS. COMMON VALUE

 “A Theory and Auctions and Competitive Bidding” (Milgrom, Weber)  Consideration of revenue in static auctions (non-sequential)  Common Value Auctions and the Winner’s Curse (Kagel, Levin) COMMON VALUE LITERATURE

 1630s: Tulip market in Amsterdam undergoes widespread speculation leading to a price bubble  Professional growers and nonprofessional speculators interested in resale value of tulips (experienced bidders)  Tulips in the 1630s were common-value goods, not private value (because of local nature of market, costs were more or less equivalent, and revenue, a common-value derived from aggregate demand, was unknown)  Each bidder receives a “signal” of market demand of certain tulips  This market demand is the true resale value of the tulips to each bidder TULIPS IN THE 1630’S

 What conclusions can be drawn from sequential auctions for common value goods, such as those that took place for tulip bulbs in the 1630’s?  Bidding strategies  Information asymmetry  Seller’s revenues OUR QUESTION

 2 participants, 2 auction rounds, 2 identical goods (with one being auctioned each round)  True value of good is unknown at the time each player submits their bid, and is drawn from a discrete distribution of 5 consecutive integers  The true value of the goods are unique to each competing pair  Each player receives a private signal of the value of the good  Each player’s signal is drawn from the same distribution as the true value of the good, thus, a player’s signal will be no more than 2 units away from true value of the good OUR EXPERIMENT

 High starting price will be announced, then begin descending by one  Each bidder’s profit = True value of good – Bid (Profit = 0 for loser)  First bidder among each competing pair to bid wins auction  Ties will be randomly broken  Each player will record their signal, bid in each round, whether they won or lost, and the true value of the good (given after the second round) AUCTION 1: DUTCH AUCTION

PROBABILITY DISTRIBUTION OF SIGNALS, GIVEN TRUE VALUE OF GOOD = 3

 Price will start from 1, all bidders willing to purchase the good at a price = 1 will indicate their willingness to bid at this price  Price will ascend by an increment of 1 until one bidder (in each competing pair) drops out  Profit = True Value of Good – Price at which previous bidder dropped out  Same relationship between signals and true values of goods holds  Each player will record their signal, bid in each round, whether they won or lost, and the true value of the good (given after the second round) AUCTION 2: ENGLISH AUCTION

 2 bidders, 2 rounds  Symmetric strategies  Same true value both rounds  Signals randomly drawn from discrete distribution made to approximate a normal distribution  Dutch auction, winner’s bid becomes known  Experienced bidders (eliminates winner’s curse) OUR MODEL

ASSOCIATED PROBABILITIES OF SIGNALS AND AUCTION RESULTS

PROFIT FROM USING GIVEN STRATEGY

NEW VALUATIONS

SECOND ROUND STRATEGIES

 What about the continuous normal distribution?  Can’t fully eradicate winner’s curse (unbounded distribution).  What about the English Auction?  What is the optimal bidding strategy in the first round?  How valuable is information about the other bidder’s signal  Is it necessary to use a model with >2 bidders?  Revenue  What is the exact relation between bidders’ auction format and seller’s revenue? PLANNED EXTENSIONS

 Kagel, John H., and Dan Levin. Common Value Auctions and the Winner’s Curse. Princeton: Princeton University Press, 2002. eBook.  Milgrom, Paul R. and Robert J. Weber (1982); “A Theory of Auctions and Competitive Bidding,” Econometrica, 50, 1089-1122.  Tu, Zhiyong. Why Do We Use the Dutch Auction to Sell Flowers? – Information Disclosure in Sequential Auctions. Diss. The University of Pittsburgh, 2006. Web. REFERENCES

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