POLYTECHNIC UNIVERSITY OF THE PHILIPPINES 1

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF BUSINESS ADMINISTRATION
GRADUATE STUDIES
Sta. Mesa, Manila

MANAGERIAL ECONOMICS

In Partial Fulfillment of the Requirements in 1MBAMAE630 Managerial

Economics for the Second Semester of School Year 2021-2022

Submitted by:
EMMANUEL
Master’s in Business Administration with specialization
in Financial Management

Submitted to:

DR. TETA SA

July 2, 2022
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Good morning Doc Baysa and Everyone. I am going to report the second part of
Module 13: Public Sector Decisions.

This presentation will focus on the following

1. Auction
2. Types of Auctions
3. Signaling and Screening

Let me begin with the definition of Auction.

Auction The word "auction" is derived from the Latin Augeo which means "I
increase" or "I augment" is a system where potential buyers compete for the right
to own a good, service, or, more generally, anything of value. Auctions are popular
because buyers and sellers believe they will get a good deal buying or selling
assets.

Another definition is that it is a method of price discovery, a method of figuring out

what someone’s going to pay for an item and who’s going to get it. An example is
that I have got a coca cola to sell and I have got six people who want it,

who’s going to get that coca cola and how much are they going to pay?

Any sort of mechanism in which the potential buyer express desire in some way
and then turns into both a price and a determination of who gets it we call that an
auction.

Typically, it used to sell a variety of things, including art, Treasury bills, furniture,
real estate, oil leases, corporations, electricity, and numerous consumer goods at
auction sites.

In economic theory, an auction is a method for determining the value of a

commodity that has an undetermined or variable price.

Tracing history, the generally accepted first auction occurred in Babylon in 500
B.C.E. according to ancient Greek scribes. During this period, auctions were held
annually, and women were sold on the condition of marriage.

There are four types of Auctions.

English auction
Also known as an open ascending price auction. This type of auction is the most
common form of auction today. In this auction, participant subsequently bid more
than the previous one and the auction ends when no participants is willing to bid
further, or when a predetermined "buy-out" price is reached, at which point the
highest bidder pays the price.
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Dutch auction
Also known as an open descending price auction. In the traditional Dutch auction,
the auctioneer begins with a high asking price that is lowered until some participant
is willing to accept the auctioneer's price, or a predetermined minimum price is
reached. That winning participant pays the last announced price. The Dutch
auction is named for its best-known example, the Dutch tulip auctions. It is well
known in being use in tulip Dutch auction.

First-price, sealed-bid auction

In a sealed-bid auction (also known as sealed high-bid auction or first-price sealed-
bid auction), all bidders simultaneously submit bids so that no bidder knows the bid
of any other participant. The highest bidder pays the price they submitted. This
type of auction is distinct from the English auction in a sense that the bidder can
only submit one bid each. Furthermore, as bidders cannot see the bid of another
participant, they cannot adjust their own bid accordingly.

Vickery auction or Second-price, sealed bid auction

This is identical to the First-price, sealed-bid auction except that the winning bidder
pays the second highest bid rather than his own or her own.

For information structure may we seek for deeper explanation from this two-auction
environment from Dr. Baysa:

Private value model, each bidder knows how much he values the object for sale
but his value is private information. In contrast to the Common value setting, a
bidder’s value would be unaffected by learning any other bidder’s information.’

Common value model, the actual value is the same for everyone but bidders have
different private information about what that value actually is.

Winner’s curse
A phenomenon that may occur in common value auctions, where all bidders have
the same value for an item but receive different private signals about this value
wherein the winners is the bidder with the most optimistic evaluation of the asset
and therefore will tend to overestimate and overpay. It is some kind of phycological
bias which means that the winner that just go to the offer accepted will feel
unhappy because they feel that they could have made a better offer or deal.

To better understand this, we are going back to earlier discussion of my partner in

this report but I will associate this to my presentation, Asymmetric information is
when one party usually has more information than the other. Furthermore, in able
for us to not make confusion from these two words adverse selection and moral
hazard lets have an example to associate with my presentation which is signaling
and screening.
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Specifically you own a health insurance and let’s just say that you know that some
people are healthy because they exercise, they eat well so they less likely to get
certain diseases so you less likely to spend money on them in comparison to
unhealthy ones where initially you may spend a lot of money on them because
when you’re the health insurance company you are paying for all their medical bills
and they just given you a monthly premium so your kind of taking a risk for them if
you’re the Insurance company.

What if you knew that you were able to distinguish the healthy and unhealthy ones
then you kind of want to charge healthy ones a lower premium because that is the
fair thing to do if you’re spending less money for them so you can charge them less
monthly premium versus those unhealthy ones.

Let’s say you ask them to fill out a form about their medical history or routines such
as have you regularly exercise and their eating habits etc.

Here is the problem with that

PEOPLE LIE
Information isn’t perfect.

They have information you don’t, that’s why asymmetric.

You, the Insurance company don’t but the person who’s being insured they kind of
know if they are healthy or not.

They know that you going to charge them less so if you think that they are healthy
and sort of overlook that and sort of gave less charge or less premium well now
you are actually paying more than average because typically you thought that they
are healthy

Well, that’s called adverse selection. Adverse is kind of means bad so Bad
selection. In short, you selected the bad people to get the healthy persons low
premium but they are actually unhealthy that’s when you made a bad decision.

One easy way to kind of get rid of them is rather than relying on them reporting the
truth is through Screening. An attempt by an uninformed party to sort individuals
according to their characteristics.

You may seek a doctor to give the result if they are healthy or not to charge the fair
amount for them. Another is Signaling. An attempt by an informed party to send an
observable indicator of his or her hidden characteristics to an uninformed party.
Signaling is where the client themselves, the person being insured can kind of
signal you as the Insurance company. An example saying that he is healthy and
his proof is he achieved a 10 km race for years and etc. Either way these two can
fix adverse selection.
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Although this is previously included on earlier presentation but to associate, Moral

hazard is a different story, Let say you are able to avoid adverse selection. You got
all the healthy people to pay a low premium and the unhealthy to pay the high
premium and all is settled. But in this case, that person who is healthy ones having
the mindset that they have insurance may tend to think on doing, out of their
healthy routine because in worst case scenario they have insurance. Thinking that
they don’t have to pay medical bills. Lot of people may think like that but maybe a
few might. Thus, when somebody does that, that’s when we called Moral Hazard.
An attempt by an informed party to send an observable indicator of his or her
hidden characteristics to an uninformed party.

Another example, when a property owner obtains insurance on a property, the

contract is based on the idea that the property owner will avoid situations that may
damage the property. The moral hazard exists that the property owner, because of
the availability of the insurance, may be less inclined to protect the property, since
the payment from an insurance company lessens the burden on the property
owner in the case of a disaster.

That’s it for my presentation. Thank you for your attention.