ARTICLE SUMMARY
This paper considers a novel feature of bidding processes in a type of auction called affiliated private value auctions.
POLICY RELEVANCE
In auctions where the item is sold to the highest bidder at the highest bid, it is difficult to distinguish between common value and private value auctions using bid data.
KEY TAKEAWAYS
- Auctions have been thoroughly scrutinized by economists.
- In a private value auction, each bidder knows how much she truly values the object being auctioned but is unsure how other bidders value it. This is distinct from a common value auction, where each bidder has a guess of the object’s value but none of them are certain they are correct.
- Sometimes a bidder’s valuation may be high because an object is valuable to everyone or because the object is particularly valuable to the bidder. This kind of auction is called affiliated.
- When an auction is first-price, the highest bidder gets the object, and pays her bid exactly. First-price auctions may be common value or private value.
- In a first-price affiliated private value auction, bidders who value the object highly realize they likely value the object more highly than other bidders, and revise their bid downward: they know they are still likely to win and get away with paying less to the auctioneer. This is called the affiliation effect.
- A rough example: if an auctioneer is offering my great-grandfather’s pocketwatch to a room full of bidders, I might bid much less than the heirloom’s true value to me. Unless the room is full of my grandfather’s other descendents, I should be able to win the pocketwatch paying a low price.
- Under these conditions, it is possible for bidders in an auction to bid less as more bidders participate in the auction. This is a novel and counterintuitive result.
- In common price auctions, bidders are uncertain what an auctioned object is worth, but all of them have guesses about its true value. If a bidder with a high valuation guess does not adjust his bid downward, he is likely to win the auction but receive an object worth less than he paid. This phenomenon is called the Winner’s Curse and closely resembles the affiliation effect. Consequently it is difficult to use bid data to determine whether a first-price auction is of the common value or private value type.
QUOTE
TAGS
About Guofu Tan
Professor Tan's research focuses on auction theory, industrial organization, competition and regulatory policies, and the Chinese economy. His most recent work is concerned with collusion, entry, and resale in auction markets; competition in international telephone markets; Nash bargaining with non-convexity; platform competition and standardization; and economic analysis of competition policy and the implications for China. In addition to his academic positions, he is currently a senior consultant in Delta Economics Group.
