First of all, we can distinguish between two main types of auction:
Private value
The marginal value of the asset being auctioned is deemed to vary from person to person. I don’t need to know your bid to know how much the asset is worth to me.
Common value
The marginal value is deemed to be reasonably equal. In this case, other people’s bids may affect your own bid.
For each of these auction types, we can consider some different auction mechanisms.
Each participant can see (and hear) what the other is doing.
There are two main types:
Participants will write down their bid and these will not be known to other participants.
There are two main types:
A second-price sealed-bid auction is also known as a Vickrey auction, and is popular with economists because the optimal strategy is a simple one – bid your marginal value. If you bid any less than your marginal value you may lose the auction even though you wanted to win. And if you bid more than your marginal value you may win when you wanted to lose. As Google explain to their AdWords customers:
“you’ll automatically pay the lowest price possible to become the winner, under your maximum.”
Google
The above holds for single-asset auctions. If there are multiple assets being auctioned, there is a choice between being a uniform price (i.e. winners all pay the same amount), or price discrimina- tion (i.e. winners pay different amounts).
Accounting and Business magazine have a very good overview of auction terminology, and a MCQ to obtain 1 unit of CPD. I highly recommend reading the short, introductory article, “Using auctions to get the right price” by Oluseun Paseda, and then take these multiple choice questions.
When the UK government wanted to auction off 3G licences they turned to a group of academic economists. By understanding auction theory, and testing it in a classroom with students, Ken Binmore and Paul Klemperer made their recommendations. The results were astounding. It raised £22.5bn, which equates to around 2.5% of GNP.
This video introduces two key concepts: the Coase theorem, and the transitional gains trap.
In the past I have used an assignment where I asked students to link together the concepts from the video with the 3G license auction. Here is a great example of their work:
In 1976 Werner Herzog made a documentary about the World Livestock Auctioneer Championship in Bloomington, Wisconsin (see here). Photographer David Williams captured some images from the 2018 competition and you can read about them here. It can be hard to understand what the auctioneer is saying but there is an explanation in the video below (for more on the “poetry” of auctions, see Jason Kottke).
the last poetry possible, the poetry of capitalism
Werner herzog
Have you ever wondered what it would sound like to dub auctioneers into rap music? Here you go: