Different forms of auctions are used for various purposes. One common auction form is the second-price auction, where each bidder submits an equal bid to buy a product or service. Another type of auction is the oral auction, where participants bid on the item orally, and the auctioneer has to sell their items to the highest bidder. This essay will discuss how these two types of auctions work and how they can be used indifferently. It will also compare how the auctions work and their results. In every auction, the winning bid consistently exceeds the value of the item being auctioned; the bidder takes the risk of paying extra costs other than losing the item.
The above types of auctions work in the following ways: The second-price auction takes two rounds. Each bidder can place a bid equal to how much they are willing to pay for the item in the first round. In the second round, the highest bidder wins and pays their bid amount. The oral auction takes place in a series of competitions. At first, a bidder can make a bid. If no other bidder raises their proposal, the bidder wins the item and pays their amount. In other words, they win as long as they are not outbid (Gerstgrasser,2019). Most recent literature in economics states that individuals would be inclined to underbid an item if they believe that other bidders are willing to pay more cash to outbid them. The idea is that this would result in a higher winning bid.
In a bidding example, a seller sells a computer worth $300.00. There are four potential bidders in the auction: A, B, C, and D. The bidders have different levels of desire for the item. Bidder A is willing to pay interest on the item and ends up the winner of the auction. (Chen and Kominers, 2018) Mostly, the highest bidder takes the item, but all have the same bid in this one. The only difference is their willingness to pay more to be the winner. The following are the bids of each bidder in the auction;
Bidder A: 300.00, Bidder B: 300.00, Bidder C: 300.00, Bidder D: 300. 00. Bidder A has already expressed their willingness to pay more for the item. Bidder B has also expressed their willingness to pay more for the item. Bidder C has not revealed any amount of what they would be willing to pay. Bidder D has not shown any amount of what they would be willing to pay. Only Bidder A and Bidder B have revealed their willingness to pay more on the computer’s value. The seller has to consider the willingness of each bidder to add on the stated item value and how the price would affect the auction process.
Assume that the minimum bid is raised to $325.00, and the seller still has three bidders (A, B, and C). Bidder A will still not change his bid. Bidder B will set a higher bid of $325.In a typical value auction, the bidder that offers the most proposal wins the item. (Kuehn, 2016)every auctioneer has to explore how adding a second bidder to an expected value auction changes the outcomes of the initial bidding and analyze how this effect alters in different market structures based on the number of bidders.
Common value auctions are used when the seller and the buyer want to sell or buy a single good in a market with no information on the fair market price (FMV). The seller does not know the market value of the good, and the buyer does not know his valuation for the good; therefore, bidders can only bid on what they believe is fair. In a joint value auction, a neutral party who does not know about the FMV must determine a single price for the good. In perfect information market structures, it consists of more than one seller and buyers. No transactions, and the FMV of the goods is fully observable. The two teams exchange their valuation to complete the selling process.
Common value auctions are used in these market structures because they can invoke a response to reveal the valuation of the goods without the need for negotiation. However, common value auctions may not be the most efficient and effective way to learn the market value. There must be at least two bidders in a typical value auction, and each one must have the first valuation. A bidder’s valuation is closed if they don’t want to spend more than they believe the good is worth them.
For example, a retailer may bid $5 for a good they believe is worth $10. If their bid is the highest, the retailer wins the good and gets $5 for it. However, if another bidder desires $10 for the good but will not pay more than $5, neither will win the good.
The conditions necessary for firms to price discriminate are:
- Identical products with different prices.
- Perfect information on the product and its cost.
- Differentiation of buyers.
In real-world situations, the conditions necessary for firms to price discriminate are not always met. Auction price discrimination, also known as a price discrimination principle, is a principle which states that by varying the prices for any multiple products, a firm can realize a more significant revenue than if it sets different prices for each product. In conclusion, this principle is widely used in the real world, as the payment for a firm is gained by prices that vary across products and by not having to buy and produce quantities of different products. This principle is also used in public auctions where sellers want to maximize their profit.
Chen, J., & Kominers, S. D. (2018). Auctions with entry versus entry in auctions. SSRN Electronic Journal. Web.
Gerstgrasser, M. (2019). Reverse auctions are different from auctions. Information Processing Letters, 147, 49-54. Web.
Kuehn, J. (2016). Estimating auctions with externalities: The case of USFS timber auctions. SSRN Electronic Journal. Web.