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Critique of Klemperer's 'Auction Design'

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Introduction

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. ...read more.

Middle

However, another way to protect this competitive buyer is to make the winner anonymous. So now this seems like the perfect auction design, sealed bid auction, anonymous winner, but this design still has its pitfalls. Imagine you were the winner of the Nike shoes by sealed bid auction and you are anonymous, you paid $200 for them. However, later you find out that the runner-up bidder (the person with the second highest bid) only bided $50. It turns out that you bid and paid $150 more than you had to, this would be very humiliating and embarrassing for you. This can be a major problem I would imagine, however eBay has sort of managed to sort a similar problem out, you put the maximum your are willing to bid, if you win, you only have to pay $1 more than the runner up, that way you are the one willing to pay the most, yet you pay the least possible given the other competitors, this way, everyone stays happy. I think this is a really smart way to do it because not only can you almost assure yourself of winning, given you've got lots of money, but it means that you'll pay as little as possible for the goods. ...read more.

Conclusion

On eBay where you can make small incremental bids as low as 20� at a time at anytime (provided the auction has not ended), with house auctions really aggressive bidders can bid huge increments which tends to scare off everybody else and so that person dominates the auction and has an advantage. This predatory action can be avoided by allowing the auction price to only rise by little increments at one time, this is sometimes seen where the auctioneers job is to offer the crowd a winning price from which the bidders only need to raise their hand to signal that they accept the price offered, this in turn removes a lot of the predatory actions of a few. There are many other interesting points made by Klemperer, he really is a scientist when it comes to auction analysis and I really admire the work he has done. So for you future bidders, watch out the winner's curse and find out plenty of information about the thing you are bidding on, and don't get over-excited, this is very dangerous. Other than that, I look forward to reading more of Klemperer's articles. ?? ?? ?? ?? Michael Hinchcliffe (3191827) 1 ...read more.

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