Critique of Klemperer's 'Auction Design'

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Michael Hinchcliffe (3191827)

Critique – Review Essay on:

What Really Matters in Auction Design”, Paul Klemperer, Journal of Economic Perspective – Volume 16, Number 1 – Winter 2002, pp.169-189

  I really like this article because I agree with most of what it says. Auctions, in recent times, have become very popular and I don’t need to interview anyone about this, I just need to examine myself to find out. Over the past few years, to be brutally honest, I have been absolutely addicted to eBay.com, an online shopping site made famous by the way in operates. Not only are all transactions made online, which is very convenient, but the way things are sold is what makes the shopping experience at eBay so unique, and fun.

  As the article mentions, auctions (like eBay) can be potentially good for both buyers and sellers. An auction can involve many buyers, for instance the auction of a house, whereas in the olden days, a negotiation over a house was usually between two people (bilateral negotiation) today there can be many sellers all competing for the same prize. This is good for the seller because now there is much more competition for the prize, therefore the seller will think he’s getting the highest price for the same item. I think this is true because as human psychology goes, humans (generally speaking), tend to handle things better if they come in small increments, using the purchase of a house as an example, one would be somewhat ‘overwhelmed’ at seeing a price tag of $1,000,000 for a house. However, instead of selling a house straight off a price-tag, if the auction method was taken, bidding might start at say $200,000, which sounds incredibly cheap. After that, the auction could rise in very small increments, say $3,000, which wouldn’t be very over-whelming for the human mind to take in. And with this method, it is much easier to convince the human mind to believe that the house is worth $1,000,000, or more!

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  However, as the article mentions, one should not be over-excited at the prospect of auctioning everything. Like most things, auctions can have their pit-falls. A major pitfall is ‘bidder collusion’. This is where buyers, or bidders, group together to cooperate with one another. This is a serious problem because this is regarded as anti-competitive behaviour which is a serious crime against the law. Sometimes, the ending winning price will be lower than what the seller had paid for it in the first place, making it an ‘unprofitable auction’. This could happen when for example, there are 10 Nike ...

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