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Different combination of goods and bidding rules could bring an outcome of significant difference.

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Introduction

EC201 Eassy 1 Anita Wong Group 26 When talking about auction, it's important to know that what are the nature of the good and the different bidding rules. Different combination of goods and bidding rules could bring an outcome of significant difference. There are two types. The first one is private- value auctions, this is when different people have different value on the same good in an auction. The bidders do not know the other bidders' valuation on the good, although they may have some rough idea. An example of it will be an art painting, it may worth a lot more to a paintings collectors then to a stamp collector. The other type is the common- value auctions, the worth of the item will be essentially the same to every bidder, but difference bidder may have difference estimate on the value of the item. An example will be an auction of a drilling right of a land for oil. The amount of oil is fixed, but bidders need to rely on professional research to tell them the estimate amount of oil that present. There are also different types of bidding rules. The English auction, also know as first price ascending bids, starts with a reserve price (the lowest price the seller is willing to sell the item), bidders successively offer higher prices, and then each bid must exceed the previous bid by an minimal bid increment. ...read more.

Middle

Apart from overbid, the other thing you can do is underbid, again, three situations can occur. Firstly, your rival's bid is lower than your bid, so you will get the item, but you will still get it if you bid on your true value. The Second situation would be that your rival bids more that your bid value but less than your true value, you didn't get your item, but you would have got it if you had bid on your true value. The third situation will be that your rival's bid is even higher than your true value, you don't get your items and it doesn't matter if you bid on your true value. If you didn't bid on your true value on a second price seal-bid auction, you risk yourself falling into the second situation of both cases, make a loss or lose the chance of getting the product at your true valuation. Truthful bidding is never worst and sometime better, this is why true bidding is the dominant strategy in a second price sealed auction. If everyone is bidding his or her true value in a second price seal bid auction, we can see equivalence quite easily with the English ascending auction. In the English ascending once the price reaches the maximum value of the second highest price, that bidder will drop out, and the highest - valuation bidder will get the item for a minimum bid increment more, which is a relatively small amount. ...read more.

Conclusion

The problem is, if the bidders know that the seller is concealing information, they will automatically expect it to be an unfavourable factor, which in turn reduce their valuation on the item. Even the information is an unfavourable one, seller might be better of to disclose it since the bidders' belief might be much worse. Difference auction have difference characteristic, generally, we can say that second price seal bid auction and English ascending auction will bring the same outcome-highest valuation bidder get the item at the second highest price. More advance mathematical techniques are needed to prove that revenue equivalence can be extended to Dutch and first price sealed bid auction, but the intuition should be clear. The main advantage of the second price seal bid auction is that it encourage bidders to bid on their own value, which maximise utility for both seller and buyer. When bidder is risk- neutral or independent estimates, it doesn't matter which type of auction to use since it's revenue equivalence and in all 4 types of auction, the item will goes to the person with the highest valuation on the product and he will pay on average the second highest value. Additional care needs to be taken when deciding bidding rules to avoid the problems of correlated estimate and collusion. When items are related, seller has to decide a way to put it in the auction without reducing its attractiveness to the bidders. ...read more.

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