Auctions and Bidding: A Primer

TLDR

Auction theory reveals surprising phenomena such as the winner's curse, revenue-maximizing bidding rules, equivalence of auction formats, welfare maximization, and testable predictions about bidder behavior. The paper aims to study these surprising conclusions of auction theory by combining theoretical analysis with a review of experimental and empirical evidence. The study uses theoretical analysis complemented by a review of experimental and empirical evidence to test auction theory predictions.

Abstract

The “Winner's Curse,” is just one of the surprising and puzzling conclusions turned up by modern research into auctions. Another is the theoretical proposition that, for example, a sealed-bid Treasury bill auction in which each buyer pays a price equal to the highest rejected bid would yield more revenue to the Treasury than the current procedure in which the winning bidder pays the seemingly higher amount equal to his own bid. There are also subtle results that demonstrate the equivalence of such apparently different institutions as the standard sealed-bid auction and the Dutch auction. Other results explain the use of standard auctions as the selling schemes that maximize the welfare of the bid–taker, or as schemes that lead to efficient allocations, minimize transaction costs, guard against corruption by the bid-taker's agents, or mitigate the effects of collusion among the bidders. Finally, for some environments, the theory makes sharp, testable predictions about the bids and profits of various classes of bidders. This paper relies mainly on theory to study these issues, but it will also review some experimental evidence and recent empirical studies testing the predictions of the theory.