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Auction Theory

Auction theory is a branch of game theory that deals with how people act in auction markets. It studies auction designs and issues like efficiency, bidding strategies, and revenue comparisons. Auction theory informs real-world auction design, especially for privatizing public sector companies or selling licenses. Standard auctions studied include first-price, second-price, open ascending, and open descending auctions.

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174 views2 pages

Auction Theory

Auction theory is a branch of game theory that deals with how people act in auction markets. It studies auction designs and issues like efficiency, bidding strategies, and revenue comparisons. Auction theory informs real-world auction design, especially for privatizing public sector companies or selling licenses. Standard auctions studied include first-price, second-price, open ascending, and open descending auctions.

Uploaded by

Shaheen Shah
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Auction theory

From Wikipedia, the free encyclopedia

  (Redirected from Revenue equivalence theorem)


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Auction theory is an applied branch of game theory which deals with how people act in auction
markets and researches the game-theoretic properties of auction markets. There are many
possible designs (or sets of rules) for an auction and typical issues studied by auction theorists
include the efficiency of a given auction design, optimal and equilibrium bidding strategies, and
revenue comparison. Auction theory is also used as a tool to inform the design of real-world
auctions; most notably auctions for the privatisation of public-sector companies or the sale of
licenses for use of the electromagnetic spectrum.

Contents
[hide]

 1 General Idea
 2 Types of auction
 3 Game-theoretic models
 4 Revenue Equivalence
 5 Winner's curse
 6 JEL Classification
 7 Footnotes
 8 Further reading
 9 External References

[edit] General Idea


Auctions take many forms but always satisfy two conditions:

(i) They may be used to sell any item and so are universal, also

(ii) The outcome of the auction does not depend on the identity of the bidders; i.e., auctions are
anonymous.

Most auctions have the feature that participants submit bids, amounts of money they are willing
to pay. Standard auctions require that the winner of the auction is the participant with the
highest bid. A nonstandard auction does not require this (e.g. a lottery).
[edit] Types of auction
There are traditionally four types of auction that are used for the allocation of a single item:

 First-price sealed-bid auctions in which bidders place their bid in a sealed envelope and
simultaneously hand them to the auctioneer. The envelopes are opened and the individual
with the highest bid wins, paying a price equal to the exact amount that he or she bid.
 Second-price sealed-bid auctions (Vickrey auctions) in which bidders place their bid in a
sealed envelope and simultaneously hand them to the auctioneer. The envelopes are
opened and the individual with the highest bid wins, paying a price equal to the exact
amount of the second highest bid.
 Open Ascending-bid auctions (English auctions) in which the price is steadily raised by
the auctioneer with bidders dropping out once the price becomes too high. This continues
until there remains only one bidder who wins the auction at the current price.
 Open Descending-bid auctions (Dutch auctions) in which the price starts at a level
sufficiently high to deter all bidders and is progressively lowered until a bidder indicates
that he is prepared to buy at the current price. He or she wins the auction and pays the
price at which they bid.

Most auction theory revolves around these four "standard" auction types. However, other auction
types have also received some academic study, such as:

 All-pay auctions in which bidders place their bid in a sealed envelope and simultaneously
hand them to the auctioneer. The envelopes are opened and the individual with the
highest bid wins, paying a price equal to the exact amount that he or she bid. All losing
bidders are also required to make a payment to the auctioneer equal to their own bid in an
all-pay auction. This auction format is non-standard, but can be used to understand things
such as election campaigns (in which bids can be interpreted as campaign spending) or
queuing for a scarce commodity (in which your bid is the amount of time for which you
are prepared to queue).
 Unique bid auctions
 Many homogenous item auctions, e.g., spectrum auctions
 Simultaneous multiple-round auctions
 Position auctions
 Generalized second-price auction

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