Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jarI Is this a game?

I Know playersI Know strategiesI Don’t know payoffs (incomplete information)

Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jar

I Is this a game?

I Know playersI Know strategiesI Don’t know payoffs (incomplete information)

Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jarI Is this a game?

I Know playersI Know strategiesI Don’t know payoffs (incomplete information)

Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jarI Is this a game?

I Know players

I Know strategiesI Don’t know payoffs (incomplete information)

Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jarI Is this a game?

I Know playersI Know strategies

I Don’t know payoffs (incomplete information)

Jar of Coins

I Jar contains some amount of coins

I Write down a bid on the jarI Is this a game?

I Know playersI Know strategiesI Don’t know payoffs (incomplete information)

Values

I The value of an auctioned item can be common:

I Value of object is the same for everybodyI Example:

the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples: consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybody

I Example:

the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples: consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example:

the jar of coins

I Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples: consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coins

I Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the value

I Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:

I Everybody knows how they value the objectI Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:I Everybody knows how they value the object

I Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:I Everybody knows how they value the objectI Different people have different values

I Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:I Everybody knows how they value the objectI Different people have different valuesI Examples:

consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:I Everybody knows how they value the objectI Different people have different valuesI Examples: consumable items

I In practice, most values are somewhere in the middle

Values

I The value of an auctioned item can be common:I Value of object is the same for everybodyI Example: the jar of coinsI Does not mean that people know the valueI Other examples: oil fields, Storage Wars

I The value of an auctioned item can be private:I Everybody knows how they value the objectI Different people have different valuesI Examples: consumable items

I In practice, most values are somewhere in the middle

Back to the Coins

I What is the winning bid?

I Actual number is $3.44

I What were your strategies?I My guess is that we just witnessed the Winner’s Curse:

I the winning bid exceeds the value of the object (in a commonvalue auction)

Back to the Coins

I What is the winning bid?

I Actual number is $3.44

I What were your strategies?I My guess is that we just witnessed the Winner’s Curse:

I the winning bid exceeds the value of the object (in a commonvalue auction)

Back to the Coins

I What is the winning bid?

I Actual number is $3.44

I What were your strategies?

I My guess is that we just witnessed the Winner’s Curse:

I the winning bid exceeds the value of the object (in a commonvalue auction)

Back to the Coins

I What is the winning bid?

I Actual number is $3.44

I What were your strategies?I My guess is that we just witnessed the Winner’s Curse:

I the winning bid exceeds the value of the object (in a commonvalue auction)

Back to the Coins

I What is the winning bid?

I Actual number is $3.44

I What were your strategies?I My guess is that we just witnessed the Winner’s Curse:

I the winning bid exceeds the value of the object (in a commonvalue auction)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jarI Drop the number a little bitI People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jar

I Drop the number a little bitI People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jarI Drop the number a little bit

I People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jarI Drop the number a little bitI People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jarI Drop the number a little bitI People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Explanation for the winner’s curse:I Most strategies are:

I Guess the amount in the jarI Drop the number a little bitI People play to try and win

I Peoples’ guesses will tend to form a normal distribution aboutthe actual value

I Highest bidder wins (one with highest error)

The Winner’s Curse

Examples:

I In the 1950s, US auctioned the rights to drill in the Gulf ofMexico

I Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

Mexico

I Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

MexicoI Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

MexicoI Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

MexicoI Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

MexicoI Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

The Winner’s Curse

Examples:I In the 1950s, US auctioned the rights to drill in the Gulf of

MexicoI Winning companies were all losing money

I Facebook IPO

How can one avoid the winner’s curse?

I Bid as if you won (and had the highest error), and decreaseyour estimate

I If an auction is set up so that you have information aboutothers’ valuation of the object, revise your bid

Types of Auctions

I First-price, sealed-bid auctions

I Everyone makes one bidI Highest bidder wins

I Examples:

jar of coins, Government contracts

Types of Auctions

I First-price, sealed-bid auctionsI Everyone makes one bid

I Highest bidder wins

I Examples:

jar of coins, Government contracts

Types of Auctions

I First-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder wins

I Examples:

jar of coins, Government contracts

Types of Auctions

I First-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder wins

I Examples:

jar of coins, Government contracts

Types of Auctions

I First-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder wins

I Examples: jar of coins, Government contracts

Types of Auctions

I Second-price, sealed-bid auctions

I Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33

I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bid

I Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33

I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder wins

I Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33

I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33

I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)

I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)I If you overbid, you might have to pay more

I If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples:

eBay (kind of) because of last-second bidders

Types of Auctions

I Second-price, sealed-bid auctionsI Everyone makes one bidI Highest bidder winsI Highest bidder pays second-highest bid price

I Suppose people bid (A)$2.17, (B)$1.40, (C )$3.41, (D)$1.33I Then C wins, and pays $2.17

I Persuades bidders to bid truthfully (not hedge the bid)I If you overbid, you might have to pay moreI If you underbid, someone who bids the true value will win

I Examples: eBay (kind of) because of last-second bidders

Types of Auctions

I English auction

I Bidding starts at 0I Bids increase until only one bidder is left

I Examples:

Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0

I Bids increase until only one bidder is left

I Examples:

Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples:

Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples:

Art auctions

I This is structurally similar to what other type of auction?Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples: Art auctions

I This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples: Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples: Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctions

I Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples: Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctionsI Winner pays just a little more than the second highest price

I Difference: have some information about other bidders’valuation of the object

Types of Auctions

I English auctionI Bidding starts at 0I Bids increase until only one bidder is left

I Examples: Art auctionsI This is structurally similar to what other type of auction?

Second-price, sealed-bid auctionsI Winner pays just a little more than the second highest priceI Difference: have some information about other bidders’

valuation of the object

Types of Auctions

I Dutch auction

I Price starts at ∞I Price decreases until a bidder accepts the price

I Examples:

used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞

I Price decreases until a bidder accepts the price

I Examples:

used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples:

used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples:

used furniture stores, stock IPOs

I This is structurally the same as what type of auction?First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples: used furniture stores, stock IPOs

I This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples: used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples: used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctions

I Everyone makes a bid in their mindI Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples: used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctionsI Everyone makes a bid in their mind

I Highest bid wins

Types of Auctions

I Dutch auctionI Price starts at ∞I Price decreases until a bidder accepts the price

I Examples: used furniture stores, stock IPOsI This is structurally the same as what type of auction?

First-price, sealed-bid auctionsI Everyone makes a bid in their mindI Highest bid wins

Seller’s Preference

I Which type of auction will generate the most revenue for theseller?

I Basically have two options:

I first-price, sealed bid/Dutch auctionI second-price, sealed bid/English auction

Vickrey’s Revenue Equivalence Theorem

Under basic assumptions, all of these auctions give the seller thesame expected revenue

Assumptions:

I Bidders are risk neutral

I Bidders estimates of price are independent

Seller’s Preference

I Which type of auction will generate the most revenue for theseller?

I Basically have two options:

I first-price, sealed bid/Dutch auctionI second-price, sealed bid/English auction

Vickrey’s Revenue Equivalence Theorem

Under basic assumptions, all of these auctions give the seller thesame expected revenue

Assumptions:

I Bidders are risk neutral

I Bidders estimates of price are independent

Seller’s Preference

I Which type of auction will generate the most revenue for theseller?

I Basically have two options:I first-price, sealed bid/Dutch auctionI second-price, sealed bid/English auction

Vickrey’s Revenue Equivalence Theorem

Under basic assumptions, all of these auctions give the seller thesame expected revenue

Assumptions:

I Bidders are risk neutral

I Bidders estimates of price are independent

Seller’s Preference

I Which type of auction will generate the most revenue for theseller?

I Basically have two options:I first-price, sealed bid/Dutch auctionI second-price, sealed bid/English auction

Vickrey’s Revenue Equivalence Theorem

Under basic assumptions, all of these auctions give the seller thesame expected revenue

Assumptions:

I Bidders are risk neutral

I Bidders estimates of price are independent

Seller’s Preference

I Which type of auction will generate the most revenue for theseller?

I Basically have two options:I first-price, sealed bid/Dutch auctionI second-price, sealed bid/English auction

Vickrey’s Revenue Equivalence Theorem

Under basic assumptions, all of these auctions give the seller thesame expected revenue

Assumptions:

I Bidders are risk neutral

I Bidders estimates of price are independent