Auctions Great Lakes Institute of Management, Chennai March 4, 2012

Another Kind of Auction In the first meeting of the class we conducted a double auction In this second class, we shall conduct three different kinds of auctions After the auction, we shall analyze and discuss the results Finally, we shall conduct an overview of various kinds of auctions and their properties

Auction A On the sheet of paper given to you, you have been assigned an ID number. Please write down your name next to the ID number The sheet shows your “Value” of the item (for example, a TV set) being auctioned off to the highest bidder This value was chosen randomly and independently by a computer so that each integers between 400 and 500 has a 1/101 chance of being picked. This is your private information. Please do not let the others see it. In Auction A, each of you will be asked to submit a Bid The person who submits the highest bid will buy the item, and pay the bid price. The profit of this person will be his/her (Value – Bid). If your bid >your value, and you are the highest bidder, you will incur a loss All other participants in the auction will earn zero profit Any questions? Fill out the upper and lower parts of the sheet.

Auction B In order to save time, we shall conduct a second kind of auction simultaneously with Auction A. In the second auction, called Auction B, the rules are slightly different. The value of the object you are bidding for is the same, given on your sheet. As in Auction A, the highest bidder will buy the object. However, unlike Auction A, the price to be paid by the highest bidder will be the second highest bid price, not the first highest bid price. In other words if your bid of 10,000 is the highest bid, and 9900 is the second highest bid, you get to buy at a price of Suppose you were also bidding for the same object in this second auction. Write down your bid next to your first bid on the right hand side. Remember, these are two independent auctions. Any questions? Fill out the upper and lower parts of the sheet with your bids in both auctions. Tear off the lower half of the sheet and return it to us.

Auction C You, and the other members of the class, are each bidding for the right to explore for oil in an offshore tract of 10,000 hectares. If you discover oil or gas, you would have the right to extract and sell it The amount of oil in the tract, V, has the value between 401 and 500 million. Every integer in range has 1/101 chance of being the value of oil. You do not know this value. Each member of the class has conducted his/her own survey and obtained an independent estimate, R(i), of the value of the deposit. The results of the surveys are only approximations with an error of plus or minus 10 crores. For example, if the true value of the deposit is 425, each number between 415 and 435 has 1/21 chance of being the report of the survey. No report of the survey would be less than 400 or more than 500.

Rules of the Auction It is a sealed bid auction After you have the chance to look at the report of your surveyor, you will be asked to submit a bid for the oil tract. The highest bidder will win the auction and pay the amount bid B(i). He/she would also receive the actual amount of oil V, not the amount given in your survey report, R(i) The profit of the person who wins the auction will be equal to the value less the bid price = V – B(i) The profit of all others will be zero. This auction may be repeated more than once

Environment of Auctions Private vs. common value One-sided vs. two-sided Sealed vs. open First-price vs. second and other Discriminating vs. uniform price

Institutions of Exchange Auctions are common institutions of exchange –English auction (estates, cars) –Dutch auctions (flowers in Amsterdam) –Double auctions (stock exchanges—Class 1) –Posted price auction (retail stores)

Properties of Auctions Allocative efficiency Revenue generation Distribution Enforcement of rules and opportunities for collusion Strategic equivalence of auction forms Bidding strategies