44 Chapter Highlights
Chapter 18
Auctions
This is a fun chapter, since it brings in some real-life examples and non-
obvious points about a widely-used form of market. The classification is
straightforward, but it would be good to ask the students for examples of
common-value and private-value auctions. (If there is a resale market, the
distinction may be a bit blurred.) You might talk about online auctions like
eBay.
The bidding rules are pretty straightforward as well. The interesting part
is the section on auction design, which deserves some careful treatment. It
is useful to describe the source of inefficiency in the profit-maximization case.
Essentially the profit-maximizing monopoly seller restricts expected output, just
as the ordinary monopolist restricts actual output.
The Vickrey auction argument is very nice—a little bit abstract, but not too
hard to prove.
It is worth going over the bidding ring example in Chapter 24 here, just to
show how collusion can work.
Finally the Winner’s Curse is a nice story. I know one person who auctions
off a jar of pennies, which is a nice common-value auction. He always makes
money on the auction, a good example of the winner’s curse!
Auctions
A. Auctions are one of the oldest form of markets
1. 500 BC in Babylon
B. Classification of auctions
C. Bidding rules
1. English auction, reserve price, bid increment
Chapter 18 45
D. Auction design
1. special case of economic mechanism design
2. possible goals
3. Pareto efficiency in private value auction
4. Case 1: seller knows values v1,…,v
n
5. Case 2: seller doesn’t know value
6. profit maximization in private-value auctions
a) depends on sellers’ beliefs about buyers’ values
b) example: 2 bidders with values of either $10 or $100
e) revenue will be (10,11,11,100)
f) expected revenue will be $33
g) is this the best the seller can do?
7. Dutch auction, sealed-bid auction
8. Vickrey auction
a) if everyone reveals true value will be efficient
b) but will they want to tell the truth?
E. Problems with auctions
F. Winner’s curse
1. common value auction
2. assume that each person bids estimated value