Auction Fundamentals

Definition of an Auction

• Method of price discovery
• Determines who gets an item and for how much
• Involves potential buyers expressing desire for an item
• Latin root: "to increase"

Purpose of Auctions

• Primary goal: Price discovery
• Example: Coca-Cola auctioned among interested buyers
• Auctions are used when item value is uncertain

Markets and Auctions

• Common markets don't require auctions as values are well known (e.g., shampoo)
• Auctions become relevant when supply is limited
• Laws often prevent auctions during emergencies to avoid exploitation

Types of Auctions

Oral Ascending Auction

• Also known as English auction
• Bidding starts at a minimum or low bid, gradually increases
• Commonly depicted in media
• Historical use dates back to Babylon

Sealed Bid Auction

• Bidders submit bids in sealed envelopes, opened simultaneously
• High bidder wins and pays their bid
• Commonly used by governments and large corporations
• Reduces risks of auctioneer collusion

Dutch Auction

• Oral auction that starts high and decreases in price
• Price is lowered until a bidder accepts
• Comparable to sealed bid auctions in theoretical outcomes

Second Price Sealed Bid Auction (Vickrey Auction)

• High bidder wins but pays the second highest bid
• Encourages aggressive bidding without the risk of overpaying
• Utilized by platforms like eBay
• Higher potential for bidding due to perceived value from other bidders

Auction Strategies

Bidder Behavior

• In sealed bid auctions, bidders often lower bids to maximize profit
• In Vickrey auctions, bidders tend to bid their true value
• Encourages more competitive bidding, particularly in English auctions

Case Study: Telecom Licenses in New Zealand

• Example of Vickrey auction resulting in a significant difference between highest and second highest bids
• Demonstrates potential pitfalls of publicizing bid values

eBay Bidding Strategies

• Advice for eBay users:
  • Track auction outcomes to gauge expected prices
  • Submit bids in multiple auctions to increase winning chances
  • Focus on auctions nearing expiration for timely information

Conclusion

• Auctions are complex with various types and strategies
• Understanding auction mechanics can enhance bidding success
• Importance of mathematical principles in auction theory

Note: The Mathematical Sciences Research Institute is involved in this field, providing resources and education.