Auction & Bidding

Auction vs. Posted Price

A commodity is floated for Sale and bids are
invited from the potential buyers, subject to a
reservation price for the seller– AUCTION

There would be a stipulated period of time.

After the auction ends the commodity would be
sold to the highest bidder.
 A commodity is floated for sale and a price tag
is attached. The commodity would be sold to the
person who is ready to pay the price. It is a take
it or leave it situation– Posted Price

The Auction we mentioned is a monopoly kind

of thing with one seller and many potential
buyers. The highest bidder wins.
Procurement Auction or Reverse Auction
$10, $9, $8
It is a monopsony kind of thing with one buyer
and many suppliers. Suppliers are submitting
their bids simultaneously. The lowest bidder
wins and sells the commodity to the buyer.

Example- GENCOs are generating power and

selling power to the DISCOM.
Different Kinds of Auctions
1) English Auction
2) Japanese Auction
3) Vickrey Auction
4) Dutch Auction
5) Buy it now Auction ( this is seen in eBay)
English Auction:
There are couple of people present in the room
A commodity will be floated and bids will be
invited from the bidders.
They will bid orally one by one.
The highest bidder will win and get the
commodity and pays his bid.
Bidding Interval: Bidding interval can be 5 or 10
If it is 5 then the successive bids will be like:
90,95,100 …
If it is 10 then the successive bids will be like:
90,100,110 ….
Value of a bidder– Value of a bidder is his/her
walkaway number eg. If the maximum amount I am
willing to pay is $92 my walkaway number would
be $90, when the bidding interval is 5.
If you are a bidder in the English Auction set up
you see how others are bidding. But there is
high possibility of Jump bid (It happens
especially when there are no bidding interval)

Hence there may be lack of transparency.

$30, $31,$32,$33,$34,$35,$36,$37,$38

Japanese Auction

A B C D E

Every participant will have to keep their hands up

in the beginning. There would be an ascending
clock. You put your hand down when the number
in the clock exceeds your walkaway number.
Comparison between Japanese and English
Auction

Japanese English
More Transparent Less transparent
No jump bid Possibility of Jump bid
Ascending Auction Ascending Auction
If you put your hand down you cant You can submit your bid more than once
participate again after hearing how others are bidding
$75-Highest bid True value-$60
Vickrey Auction

Bidders are submitting their bids in sealed

envelope simultaneously. The envelopes will be
opened. The highest bidder wins and pays the
2nd highest bid.

Every bidder has a dominant strategy- Bidding

true value
$500 $490 $480 $470
Dutch Auction

It is a descending Auction.

Flowers are sold in Holland .

Buy it now Auction

Typically in eBay. A beautiful Yacht is displayed

A price tag of $3000 is attached.

“or Best offer”
 $500,$490,$480,$470,$460,$450
Revenue Equivalence:
Different Auction mechanism would give more
or less same revenue to the seller.
Buyers premium:
The Auction house like SOTHBEY takes 20%
commission from the buyer.

If the maximum amount of money you are

willing to pay for a commodity X is $120. Then
your maximum bid should be$100.
Winners Curse

Sometime you win the auction. After winning

you may feel that you have overpaid. This
happens only in first price auction.
Online Auction in eBay and the use of proxy bid.
eBay adheres to 2nd price Auction.

$100 $25 $26

$75 $76
 Guitar A- 3days Guitar B-7days
The commodity you want to buy has substitutes.
How will you allocate your bid?

My total budget for a Guitar is $400.

But many Guitars are floated by different sellers

in eBay.
Porsche V11 $50,000 12000,13000,14000

Astute bidders do not bid their true proxy bid in the

beginning. They bid it just before the auction ends. This is
known as SNIPING.
In eBay a typical Auction continues for 7 days.
If you bid your true value at the beginning other bidders
would get an idea about the real worth of the commodity.
They may bid high. Most of the bidders are lazy. They bid
casually without knowing too much about the commodity. If
you bid high in the beginning, they may start working hard to
gather information on the commodity, eventually that would
make them bid a higher value. And you do not want that.
$1000 for commodity X $600

$800

For consumer goods Auction is becoming

relatively unpopular.

Research shows that rich people are impatient

and they prefer posted price option.

There are negative outcome bias.

$7billion $6 billion 2-6 ,Avg-$4billion
$4b+$2billion=$6billion
You want to acquire a company X without
knowing the real resale value of the company.
But whatever the real worth of the company is,
you are sure that you can add 50% to its worth,
before reselling. You know the real worth of the
company is lying between $2 billion- $12 billion.
All values between $2 billion- $12 billion are
equally likely.
First Price Sealed bid Auction
Bidders are simultaneously submitting their bids
in sealed envelopes. The envelopes are opened
simultaneously. The highest bidder wins and pays
the bid.

If your true value is 100 you should shade down

your value closest to the 2nd highest bid( which
you think the 2nd highest bid would be ). May be
81.
When the bids are Uniformly distributed. 0
20 40 60 80
The value of the bids are lying between 0-100
with equal probabilities.
Your true value is 80 and there is one other
bidder. Your bid should be 41.
Your true value is 80 and there are two more
bidders. Your bid should be little more than 53.2
Your true value is 80 and there are 3 more
bidders. Your bid should be 61.
Two players are bidding in a first price auction
for a 1901 s US states penny, a very valuable
coin for collectors. Each player values it
somewhere between $750K and $1000K. Each
player should bid βi=(750K+δi)/2 . Now there
are two bidders with the true values 850K and
800K. What would be the winning bid in a first
price auction? If it is a 2nd price auction what
would be the winning bid?
Multiunit Procurement Auction
50,51,53,56,58,59,60 Lowest 3 bids would be winning bids.
NTPC- 50,59 Adani-51,53

Uniform procurement Auction

The lowest K bids would be the winning bids.
Each winner would be paid equal to (K+1) th bid.

Differentiating procurement Auction

The lowest K bids would be the winning bid and
each winner would be paid their bid.
The Case of Auction by FCC in the US.

In the year 1994, the Federal Communication

commission of the USA began first Auction of
radio licenses in the nation’s history. After 46
rounds of bidding spanning 5 days,10
nationwide licenses for new radio frequencies
on which to produce “personal communication
services (PCS)” sold for a total over $600 million.
Hence the product was: “license frequencies”
The rules of the Auction:
1) Reservation price for each license was
$350,000.
2) Simultaneous submission of bids by different
players in multiple rounds for more than one
licenses.
3) No firm could purchase more than 3 licenses.
4) In the earlier rounds, every firm could bid on
any combination of licenses it wished, in the
later rounds, each firm could bid on no more
than three.
5) To stay in the auction, firms had to submit a
bid on at least one license in every round.
6) And this bid had to be at least 5% higher than
the high bid on the previous round.
7) The Auction ended when no new bids were
submitted for any license.

Strategic Issues that came up

1) What is the demand for PCS services and
how fast it would grow?
2) Which licenses were substitutes and which
were complements?
3) Is it worthy to participate in the auction?
Does it make more sense to wait for the regional
auctions that would take place few years later?
4) Would it be wise to wait till these licenses
would be offered for resale on a later date?
How it was played?
Four firms put up $350,0000 ,allowing them to
bid on all 10 licenses simultaneously – even
though they can eventually win only three.

On the first round the sum of 10 high bids

exceeded $100 million.

Jump bidding was Common.

Most of the bidders wanted to purchase more
than one license.