Video Title: Conducting an Auction

So, welcome everyone. What we are planning to do here in this MOOC is to figure out how people
value goods or products. And one of these measures is known as something called willingness to
pay, which is the maximum that would pay for a certain good or product. Why this is useful is that it
helps marketers figure out what an optimal price should be in the market. So, the purpose of the
study is purely that. All of you have a pen and a paper. Can I have a show of hands there to home
many of you like mangoes here? All of you do. You don't like mangoes? You do. Okay great. How
many of you like Alphonso Mangoes? Okay. Great.

What we are going to do here is have a small auction of actual mangoes. So, I have a bowl of
mangoes here. This is one kilo of top-quality Alphonso Mangoes. You can check out the quality. Just
pass it on. And just take a look and think how much you would be willing to pay. If you don't like you
can... So, I'll tell you what to do. If you don't like Mangoes also just think of how you would value it?
So, it would, of course, depend on whether you like them or not and try to have a value. This is
slightly black here, but I assure you it is pretty fresh. So, just take a look. So, essentially this entire set
of mangoes and I just want to show you this because the price is here, and it is for sale today.

We are going to do what is known as a Second Price Auction. How many of you know what a second
price auction is? You probably know. Would you quickly like to explain what a second price auction
means?

Male Speaker: So, everybody will start bidding, bidding, bidding and when the maximum bid comes,
so the next best bid will get the prize.

Professor: That is effectively what it is. I'll just explain to you what you need to do. There is one small
difference here. Everybody will not keep bidding; you cannot revise your bid's. What you have to do
is take that piece of paper, write your name and a rupee value so you are going to buy one kilo of
mango and we are actually going to sell it. Mayurakshi will collect cash, okay. Put down a number
that you are willing to pay for this mango, for this one kilo of mangoes, the winner will be the person
who has put the highest bid and but the amount you pay will be the second-highest bid.

So, I'm not going to bias you. I will give you a completely different example. Suppose, I was
auctioning an apartment and the highest bid is one crore and the second-highest bid is 90 lakh
rupees, the person who has bid one crore will be in the apartment, but pay 90-lakh rupee, which is
the second. Why this is actually a pretty famous theory that got a Nobel Prize by the way to a person
called Vickery. It essentially says that with this kind of incentive structure, it makes sense for you to
bid your true valuation. So that is an additional to it. If you have value it at rupees X and bring that X
that actually is your game theoretically best bid because you end up paying slightly less than that.
That's all I have to say. You have seen the mangoes. What I would like you to do is write down your
name. So, we are interested in the names only for purpose of actually giving out the mangoes. We
do not require your names in any other way. In my... as the marketing researcher why I am
interested in this is I will get a distribution of what each of you is willing to pay essentially so I'd like
to do some statistical inference from that.

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So, all you have to do right now is write down your name and a bid in rupees and the highest bidder
gets these mangoes for the second-highest bid. Please do not look at each other. Please bid
completely independently. I will collect the mangoes. If you're done, you can just handover the slips.
Just fold it. So that nobody else sees it and hand it over to me, done. So, before we actually find out
who has won and what they will pay, can I have a volunteer who would like to tell me what they bid
and why? Introduce yourself first and please talk into the mic.

Professor: What is your name?

Kaushik: I'm Kaushik.

Professor: Kaushik, what do you do Kaushik?

Kaushik: I'm a marketing intern over here at IIM Bangalore.

Professor: And how much did you bid?

Kaushik: 21 rupees.

Professor: 21 rupees for a kilo of mangoes.

Kaushik: Yeah, because I don't like mangoes.

Professor: You don't like mangoes. So, but why 21 rupees why not 0 rupees.

Kaushik: I thought it is an Alphonso.

Professor: 21 for a kilo of mangoes. Great. Anyone else here? Let's go. Yeah. What is your name?

Natasha: Natasha.

Professor: Could you use the mic, please?

Natasha: I'm Natasha.

Professor: Yeah, what did you bid?

Natasha: I bid 120 rupees

Professor: Why?

Natasha: This is a local Alphonso. It is not an authentic one, which would cost a lot more and I was
recently in the markets seeking local Alphonso.

Professor: So, you have some sort of reference price that you are used to pay. How do you know it is
a local Alphonso? Are you an expert in Mangoes? Are you from Ratnagiri?

Natasha: I'm from Pune. I have spent a lot of time in Bombay and Pune. Mango is all of my life.

Professor: So, these were not the best Ratnagiri mangoes, right? Okay. What is your name?

Roosha: My name is Roosha and I think I'm bid it at an absurd amount.

Professor: How much?

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Roosha: 300 Per Kg. Because I thought mangoes were expensive.

Professor: Okay. Great and do you like Alphonso mangoes?

Roosha: I like mangoes, but the mangoes that we got was actually pretty ugly so...

Professor: Yeah there was a slight black spot on it. I know. I know. Okay. Great.

So, as you see there are different people who have different likings of mangoes. Some people have
some expertise. Some people may not. And based on your own valuations, you can come up with
different prices. What can also happen is that if you used to buy these Alphonso mangoes, you might
have a reference price, as one of our respondents there and based on that we have different bids
here. Now Mayurakshi, can I ask you to come forward? Would you like to... I don't think... At this
point, I don't think we will go through everybody's bid. I won't say X has bid Y that is unnecessary.
What I would just like you to do is look at all the bids and let's take a look at the top 3, of course, the
top bid is going to win and the second-highest amount that is going to be paid. So, there is Madhu
who has bid 300 and there is Shreya has bid 950 would like to share your valuation.

Shreya: So, with Usha here, so I just thought mangoes were a whole lot more expensive than they
are and I thought that Alphonso mangoes are the most expensive one regardless of quality intended.

Professor: Fair enough. Yes.

Shreya: So, I just thought the realistic market price is somewhere in high 800's.

Professor: And you bid 950. Great.

So, this is actually very nice because see you have from extremely low prices and extremely high
prices and these are actually characteristics of real auctions. So, one of the things that happens, and
this is actually something that happened in real auctions. So, what we as marketers are interested in
is his entire distribution and we can do some statistical inference.

So, there is Mridul who has bid for 450, which is the third highest. Who is Mridul? Okay.

Professor: What was your logic? Let find that as well.

Mridul: I easily don't go to the market. I just know about the prices. I thought Alphonso mangoes like
the highest price.

Professor: Okay. Great.

See we have different kind of heuristics, evaluations, and et cetera which was exactly what I wanted
to bring out in this class. So, congrats Shreya, you win this kilo of mangoes and you pay Pooja's price
which is 500 rupees. Can anyone tell me... so this was bought at Big Bazaar today. Can anyone tell
me what is the MRP of this box is? 70, any other guesses? 120. Any other guesses? We are playing
prices, right? So, the most correct answer is not going to get it. She is still going to get the mangoes.
150, 200 is the right. It is 199 and I have a special surprise for you. We are not really interested in
making money. So, you will get these mangoes for free. We just wanted you to believe for the
purpose of this exercise we wanted you to believe that you are paying, but our intention was not to
sell these mangoes. So, we will just pack this up and these are yours to do whatever you would like
with them.

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So, if we had told you that you don't have to pay then you can enter any amount, right? And the
highest is you are going to bid. That wouldn't have worked out. So congrats, your time has been well
spent here and sometimes the winners' curse is not really a curse and that is all we have for today.
Thank you. Thank you everyone.

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