Introduction Auction Economics Essay
Auctions are events where the buyers of a given product bid competitively through a closed, open format. Therefore auctions are a common phenomenon in the market and tend to occur naturally in the sale of intermediate and natural goods, with a broader application in the modern-day economy with government bonds. Open auctions involve the buyers biding with the awareness of what their competitors are bidding, often used to sell assets like land and livestock.
Closed Auction Economics
On the other hand, closed auctions involve buyer biding without the awareness of their competitors’ bids, often used in the sale of companies. Therefore, auctions are generally efficient mechanisms for purchasing and selling various essential and rare, expensive commodities (Häubl & Leszczyc, 2019). Moreover, auctions are valuable tools in the economy are they provide both parties, the buyer and seller, with the chance to determine the value of a given commodity, especially when it is hard for either of them to determine.
Oral Auction Economics
Oral auctions are interactive events that involve the buyers revealing the price they are willing to pay for the auctioned products and can help online or in a live audience. This is applicable in ascending bids, whereby the seller raises the price gradually and sells it to the buyer who is willing to pay the highest price. Thus, unlike second-price auctions, all competitors know the price at which the winning bidder gets the product in oral auctions.
Consequently, oral auctions facilitate the collusive practices between the various bidders, limiting the sellers’ leverage in generating a higher bid. On the other hand, second-price auctions involve the bidders submitting their bids simultaneously, which are not revealed to other sellers (Tukiainen, 2017). Therefore the sellers have more leverage, as the various bidders cannot collude with each other.
Second-price Auction Economics
Furthermore, second-price auctions involve the highest bidder, who wins, pays at least one percent more than the second-highest bidders would have potentially paid. These conditions must facilitate the bidders to increase the price as the potential buyer. If two bidders bide the highest price, another round of bids is allowed until only one of them can afford to pay the highest price. Thus a second-price auction is designed to provide the various bidders the different prices without overpaying.
In oral auctions, an increase in the number of bidders increases the expected revenue for the seller. This is because the bidders’ price will pay on the information, whose price is expected value information. Therefore, the bidders maximize the expected payoff, a variable determined by the product of the difference in the expected utility from the product and its value to them and the probability of winning the bid.
Therefore, an increase in the number of bidders increases the aggression with which the bidders will participate to compensate for the adverse effect on the probability (Häubl & Leszczyc, 2019). Oral auctions are usually open auctions whereby all buyers have the product information and are aware of their number of bidders and its impact on their probability of winning the bid.
This is because there is no extra cost to obtaining the information. In the case of a closed auction, the bidders have no access to information that would inform the price they would be willing to pay for the commodity. Therefore, based on expected value information, in oral auctions, an increase in the number of bidders would have a competitive effect among the bidders, increasing their willingness to increase the price they are willing to pay for the commodity leading to high bids.
Common value auctions
Common value auctions involve items in which the bidders have a typical value attached to the product based on the information obtained from various sources. This is opposed to private value auctions, where the buyers’ valuation of the product is independent of their specific valuations. In common value auctions, bidders may influence each other based on their reactions and consequently signals, which is the basis of the peer valuation. Therefore, an individual bidder has information on the number of bidders participating in the auctions.
Therefore, an increase in the number of bidders would reduce the probability of their bid winning, information that is available to all the potential buyers (Dong & Sing, 2016). Therefore they will increase the price they would be willing to pay for the commodity auctioned and consequently the auction outcome. This is similar to a perfectly competitive market where the number of producers and buyers is high, all of whom have perfect information about the market. Therefore, an increase in the number of buyers would increase the demand and, consequently, the product’s price.
Auctions provide a situation whereby the buyers reveal the value they have attached to the product being sold. This provides information to all the potential buyers and sellers. Therefore auctions permit the seller to price discrimination based on the price they are willing to pay as auctions meet the relevant criteria. The possession of information provides the seller with market power (Froeb et al., 2018).
Additionally, the bidders’ price is the willingness to pay for the product is essential information to the sellers. It helps them recognize the difference in demand for the products amongst the various buyers. Additionally, the auctioneers can avert arbitration on the product based on the requirements for sale.
Auction Economics Essay References
Dong, Z., & Sing, T. F. (2016). How Do Land Auction Formats Influence the Market Structure and Aggregate Surplus of Real Estate Development? Real Estate Economics, 44(3), 691–725.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics (5th ed.). Cengage Learning.
Häubl, G., & Leszczyc, P. T. L. P. (2019). Bidding Frenzy: Speed of Competitor Reaction and Willingness to Pay in Auctions. Journal of Consumer Research, 45(6), 1294–1314.
Tukiainen, J. (2017). Effects of Minimum Bid Increments in Internet Auctions: Evidence from a Field Experiment. Journal of Industrial Economics, 65(3), 597–622.