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Auctions

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Auctions

Auctions are a valuable tool in the economy for facilitating the exchange of goods and

services, gathering information about the market, and ensuring fair and transparent pricing. By

allowing buyers to compete against each other, auctions can help drive up sellers' prices while

also providing buyers with an opportunity to get a good deal. Additionally, the well-defined

process of an auction can help to reduce the risk of fraud and build trust between buyers and

sellers. In this essay, we will examine the value of auctions in the economy by looking at their

role in facilitating trade, gathering information, and ensuring fair pricing.

Oral and Second-Price Auditions

Oral auctions, also known as English, are auctions in which the bidding process is

conducted out loud, with bidders raising their hands or calling out their bids (Milgrom, 2021).

The auctioneer will start the bidding at a low price and continue to raise the price until only one

bidder remains. The final bid made by the winning bidder is the price they will pay for the item

being auctioned. Second-price auctions, also known as Vickrey auctions, are where bidders

submit sealed bids without knowing the bids of other participants (Milgrom, 2021). The person

who places the highest bid wins the auction and is responsible for paying the amount that was

offered as the price for the item. Instead than competing with one another to see who can place

the highest offer on an item, bidders will have an incentive to bid an amount that reflects their

honest opinion of its value.

The main difference between oral and second-price auctions is how the bidding process is

conducted. In oral auctions, bidders can see the bids of other participants and adjust their bids

accordingly, whereas, in second-price auctions, bidders do not have this information. As a result,

oral auctions can sometimes result in higher prices for the seller, while second-price auctions can
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lead to more efficient outcomes where bidders pay a price that reflects the item's true value. Oral

auctions are often used for large-scale sales, such as real estate and agricultural items, as they are

quick and efficient (Quince, 2019). Second-price auctions, meanwhile, are used in online

auctions and can encourage higher bids as participants know they will only pay the second-

highest bid price. Both types of auctions are designed to yield the fairest market price and

encourage competition, resulting in a win-win situation for buyers and sellers.

Expected Value of an Oral Auction

The expected value of an oral auction is the sum of the probabilities of each possible

outcome multiplied by the value of that outcome (Swanson et al., 2019). For example, if there

are two bidders in an oral auction, the expected value would be the sum of the probability of

each bidder winning multiplied by the value of the item to each bidder. If bidder A values the

item at $100 and bidder B values the item at $50, the expected value would be (0.5 x $100) +

(0.5 x $50) = $75. If The expected value changes if a third bidder to the auction, the probability

of each bidder winning will be reduced, and the value of the item to each bidder will also change.

For example, if the third bidder values the item at $75, the expected value would be (1/3 x $100)

+ (1/3 x $50) + (1/3 x $75) = $75.

In this case, adding a third bidder has not changed the expected value of the auction. On

the other hand, an oral auction with a greater number of participants will probably end with a

larger winning offer. This is because bidders will have to compete against each other in order to

win the auction, which can drive up the price. Additionally, the presence of more bidders can

also increase the item's value to each bidder, as they may be more willing to pay more to outbid

their competitors.

Bidders in Common Value Auction

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In a common value auction, the auction's outcome is affected by the number of bidders

(Charness, Levin & Schmeidler, 2019). If there are many bidders, the item's value will increase,

as each bidder will be willing to pay more to secure the item. This is because the item's value is

uncertain, and each bidder hopes to gain more information about the item's true value by

observing the bids of other bidders. Therefore, if there are a greater number of bidders

participating in an auction with a common value, the winning offer will most most likely be

greater.

Relation to Market Structures

The number of producers in a market can also affect the price. In a monopoly, for

example, there is only one producer, so the producer sets the price. In an oligopoly, there are a

few producers, and the other dominant producers set the price; in a competitive market, there are

many producers, resulting in a more competitive price. Therefore, the number of producers in a

market can affect the price, just as the number of bidders in an auction can affect the winning bid

price (Jansen et al., 2020).

Conditions for Price discrimination

Companies have to fulfill a number of requirements in order for price discrimination to

be profitable for them. First, the company has to have some market power, which means it has

the ability to charge prices that are higher than their average cost of production. This can be

achieved through various means, such as owning a unique product or having a large market

share. Second, the firm must be able to identify and segment different groups of buyers based on

their willingness to pay. This can be done through auctions, where buyers reveal their value for

the product, or through other means, such as offering different pricing tiers for different types of

customers. Third, the firm must be able to prevent buyers in different segments from arbitraging
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or buying at a lower price and reselling at a higher price. This can be done through contracts,

such as non-resale clauses, or by limiting the number of goods, each buyer can purchase.

Overall, firms must have market power, be able to identify and segment buyers and

prevent arbitrage to price discriminate successfully. Auctions can be useful for achieving these

conditions, as they allow firms to gather information about buyers' willingness to pay and

prevent arbitrage through sealed bids.

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References

Milgrom, P. (2021). Auction research evolving: Theorems and market designs. American

Economic Review, 111(5), 1383–1405.

Quince, E. (2019). Tales from the 20th century. Property Journal, pp. 60–62.

Swanson, C. S., Bergstrom, J. C., & Trent, J. N. (2019). The total value of the McNeil River

State Game Sanctuary. In Valuing Wildlife Resources in Alaska (pp. 337-357).

Routledge.

Charness, G., Levin, D., & Schmeidler, D. (2019). An experimental study of estimation and

bidding in common-value auctions with public information. Journal of Economic

Theory, 179, 73-98.

Jansen, M., Staffell, I., Kitzing, L., Quoilin, S., Wiggelinkhuizen, E., Bulder, B., ... & Müsgens,

F. (2020). Offshore wind competitiveness in mature markets without subsidy. Nature

Energy, 5(8), 614-622.