# Auction Theory – summery of Vijay Krishna: Auction Theory (2002).

- Auctions are useable whenever a seller of an object (private good) is unsure about the values bidders attach to the object (asymmetric information between seller and buyers). - Standard auctions: the person who bids the highest amount is awarded the object (single unit), or the K highest bids are awarded the K objects for sale (multiple object auction) - Efficient auction: the bidder with the highest value is awarded the object (single unit), or the K objects for sale are awarded to the K highest values (multiple object auction) - Expected revenue = expected selling price = (ex ante) expected payment - General economic assumptions: - For all agents, preferences are quasi-linear in money - All bidders choose symmetric equilibrium (SE) –strategies (SES) 1. Single object, private value auctions (Ch. 2-4): Second-price First-price auctions a) SES: β II ( x) = x β I ( x) = [YI | YI < x] b) Efficiency: a SE is efficient efficient c) Revenue equivalence, but variance R II > variance R I - Dutch- and First-price, respective English- and Second-price auctions are outcome equivalent. - What happens if: bidders are risk-averse, - have budget constraints, - are asymmetric, - can resale? 2. Mechanism Design (Ch. 5 and 16): The VCG-mechanism can be used to allocate private (or public) goods. It is a direct mechanism implementing the utilitarian social welfare function (max. revenue) in dominant strategies. If there is only two buyers, the revenue to the seller from selling multiple objects as a single bundle exceeds the revenue derived from bundling them in any other way. Used to sell multiple non-identical private objects the VCG-mechanism is efficient, individual rational, incentive compatible, and max. expected revenue to the seller. 3. Single objects, interdependent values (Ch.6-9+11): English- Second-price First-price a) SES: β in (6.4-5) β II ( x) = v( x, x) β I ( x) = (6.7) b) A SE is (signals affiliated, single crossing condition): efficient efficient efficient c) Revenue (R) and the Linkage principle: RII ≥ RI Reng ≥ - What happens if: asym. equilibria, - informed bidders, reserve prices, entry fees, bidding rings? 4. Multiple objects, private values (Ch. 12-15): - Sealed bid auctions: Discriminatory (pay-your-bid)-; Uniform price-; Vickrey auction - Open form auctions: Dutch-; English-; Ausubel autcions 1) Identical objects (= units), ’all-in-one’ auctions: b) Of the Sealed-bid (Open) auctions, only the Vickrey (Ausubel) auction is efficient in general. c) Revenue in any auction with the same allocation rule (p.62) differ at most by an additive constant 2) Identical objects, sequential sales (single unit demand): a) SES: First-price auctions (Propersition 15.2), β kI ( x ) = E[YK | Yk < x < Yk −1 ]
II Second-price auctions (Prop. 15.3), β K ( x ) = x , and for k < K : β kII ( x ) = β kI+1 ( x ) b) Efficiency: Both First-price and Second-price sequential sales auctions are efficient. c) The sequential sales First-price and Second-price auctions are revenue equivalent.