EK0007

MICRO AND MACRO ECONOMIC

CHAPTER 10
Auctions and Bargaining

ACCOUNTING PROGRAM
Overview
In this chapter, we explore the economics behind
situations where you, the consumer, can affect the
price you pay. We also examine how these same
bargaining principles affect your everyday life,
perhaps in ways that you would have never even
imagined
Objectives
• Types of Auctions
• Open-Outcry English Auctions
• Open-Outcry Dutch Auctions
• Sealed Bid: First-Price Auction
• Sealed Bid: Second-Price Auction
Contents
• Auctions
• Bargaining
Auctions
• is a market process in which potential buyers bid on a good and
the highest bidder receives the good
• some goods don’t have wellestablished prices, making auctions a
particularly useful method of selling that encourages price
discovery
• One factor is that auctions can be fun
• Many buyers might get a thrill of competing for the Apple iPod Touch
on eBay, with the possibility of getting a really good deal, rather than
walking into the Apple store and paying the posted price
• The answer is that the seller doesn’t know willingness to pay (her
private valuation), and the auction is useful partly because the
seller doesn’t need to know this information (and this is, of
course, related to the price discovery role of auctions)
Types of Auctions
• An open outcry auction is an auction where bids
are public and bidders compete actively against one
another
• A sealed bid auction is one in which bidders place
their bids privately so that no other bidder knows
the bid of another participant
• distinguishes auctions is how price is determined
• Four major auction types
• Open outcry English auctions
• Open outcry Dutch auctions
• Sealed bid first-price auctions
• Sealed bid second-price auctions
Open-Outcry English Auctions
• This is the “going, going, gone” kind of auction used at
establishments like Sotheby’s when it sells expensive
paintings and antiques, and what you may have witnessed
first-hand at estate auctions
• An English auction consists of an auctioneer and several
bidders
• The auctioneer begins the bidding process by announcing a
low starting bid
• an English auction is an open-outcry auction in which the
price increases until there is only one standing bid
• That bidder wins the item and pays the bid
• English auctions are commonly used to sell real estate,
foreclosed homes, cars, and antiques and are popular to
raise money for charity
Open-Outcry Dutch Auctions
• A Dutch auction is an open-outcry auction in which the price
decreases until a bidder stops the auction
• The bidder who stops the auction wins the item and pays his
bid
• in a Dutch auction the auctioneer begins the bidding at an
offer price far above any bidder’s value and lowers price in
increments until one of the bidders accepts the offer
• the auction continues in a descending order of values until
someone announces that he is willing to buy at a given price
• The first person who accepts at a given price wins the auction
and pays that price
• the Dutch auction is an open-outcry descending price auction
Open-Outcry Dutch Auctions
• A risk seeker gladly accepts this bet, a risk averter declines,
and a risk-neutral person is indifferent
• Risk neutrality is a convenient benchmark for small and
moderate stakes, and here we will assume that bidders are
risk neutral
• Factor should also influence her bidding
• private value
• the number of bidders competing against her in the auction
Sealed Bid: First-Price Auction
• Sealed bid first-price auction is an auction in which bidders
privately submit bids at the same time
• The winner is the person who has submitted the highest bid
• The highest bidder wins the item and pays an amount equal to her
bid
• all bids are made privately so that each bidder knows only
her own bid
Sealed Bid: Second-Price Auction
• A sealed bid second-price auction is an auction in which
bidders privately submit bids at the same time
• The highest bidder wins the item and pays an amount
equal to the second-highest bid
• The major difference between the first- and second-
price auctions arises when it comes time to pay for the
good
Bargaining
• Bilateral bargaining is a form of exchange that has
one seller actively negotiating with one buyer over
the terms of trade
• Determines Bargaining Outcomes
• In bargaining terms, the most important element that
determines final outcomes is called bargaining power
• realize have little influence
• bargaining power relates to “who holds the chips” or
who has the power in the negotiations
• bargaining power helps to determine whether, and at
what terms, the parties transact