liz dimascio paige warren- shriner mitch justus dutch and english auctions in relation to the tulip...
TRANSCRIPT
Liz DiMascioPaige Warren-ShrinerMitch Justus
DUTCH AND ENGLISH AUCTIONS IN
RELATION TO THE TULIP MARKET
High initial starting price—price lowers until acceptable to a bidder
Strategically equivalent to fi rst-price sealed bid auctions
Dutch flower auction takes place every weekday in Aalsmeer, Netherlands
Retail flower salesman are participants
Frequently used in auctions for nondurable non-consumer goods
DUTCH AUCTIONS
Sequential
Bidders are purchasing goods for resale
Identical goods, identical bidders
Same number of goods each round
Independent Private Values (IPV): has a diff erent value for each bidder (= Revenue – IP Cost)
TYPICAL FEATURES OF NONDURABLE GOODS AUCTIONS
“Why Do We Use the Dutch Auction to Sell Flowers? —Information Disclosure in Sequential Auctions” (Tu)
Given several simplifying assumptions, Dutch auction with only winning bid announced produces higher revenue than English auction in a sequential environment
PRIVATE VALUE LITERATURE
Bidders bid symmetrically according to bid function B(v)
In second round, winner believes that loser’s value lies in interval [0,v) where v is winner’s value
Loser calculates second bid based on fi rst, losing bidB(v) for fi rst round = v/2First stage winner randomizes over (v/2, 3v/4)Loser will not bid if v < v’/4, where v’ is inferred
valuation of fi rst stage winner In second stage, winner and loser are brought to
relatively level playing ground (since loser of fi rst round has informational advantage, while winner randomizes)
DUTCH AUCTION WITH WINNER’S BID REVEALED
Common Value Good: has one true underlying value for all bidders. This value is unknown at the time the bid is placed, and bidders receive independent signals of it. Values are infl uenced by others’ signals.
Private Value Good: has a diff erent value for each bidder Usually used to describe modern day auctions of
nondurable non-consumer goods
PRIVATE VALUE VS. COMMON VALUE
“A Theory and Auctions and Competitive Bidding” (Milgrom, Weber) Consideration of revenue in static auctions (non-sequential)
Common Value Auctions and the Winner’s Curse (Kagel, Levin)
COMMON VALUE LITERATURE
1630s: Tulip market in Amsterdam undergoes widespread speculation leading to a price bubble
Professional growers and nonprofessional speculators interested in resale value of tulips (experienced bidders)
Tulips in the 1630s were common-value goods, not private value (because of local nature of market, costs were more or less equivalent, and revenue, a common-value derived from aggregate demand, was unknown)
Each bidder receives a “signal” of market demand of certain tulips This market demand is the true resale value of the tulips to each
bidder
TULIPS IN THE 1630’S
What conclusions can be drawn from sequential auctions for common value goods, such as those that took place for tulip bulbs in the 1630’s?
Bidding strategies Information asymmetrySeller’s revenues
OUR QUESTION
2 participants, 2 auction rounds, 2 identical goods (with one being auctioned each round)
True value of good is unknown at the time each player submits their bid, and is drawn from a discrete distribution of 5 consecutive integers The true value of the goods are unique to each competing
pair
Each player receives a private signal of the value of the good Each player’s signal is drawn from the same distribution as
the true value of the good, thus, a player’s signal will be no more than 2 units away from true value of the good
OUR EXPERIMENT
High starting price will be announced, then begin descending by one
Each bidder’s profi t = True value of good – Bid (Profi t = 0 for loser)
First bidder among each competing pair to bid wins auction
Ties will be randomly broken
Each player will record their signal, bid in each round, whether they won or lost, and the true value of the good (given after the second round)
AUCTION 1: DUTCH AUCTION
Price will start from 1, all bidders willing to purchase the good at a price = 1 will indicate their willingness to bid at this price
Price will ascend by an increment of 1 until one bidder (in each competing pair) drops out
Profi t = True Value of Good – Price at which previous bidder dropped out
Same relationship between signals and true values of goods holds
Each player will record their signal, bid in each round, whether they won or lost, and the true value of the good (given after the second round)
AUCTION 2: ENGLISH AUCTION
2 bidders, 2 rounds
Symmetric strategies
Same true value both rounds
Signals randomly drawn from discrete distribution made to approximate a normal distribution
Dutch auction, winner’s bid becomes known
Experienced bidders (eliminates winner’s curse)
OUR MODEL
What about the continuous normal distribution?
Can’t fully eradicate winner’s curse (unbounded distribution).
What about the English Auction?
What is the optimal bidding strategy in the first round?
How valuable is information about the other bidder’s signal
Is it necessary to use a model with >2 bidders?
Revenue
What is the exact relation between bidders’ auction format and seller’s revenue?
PLANNED EXTENSIONS
Kagel, John H., and Dan Levin. Common Value Auctions and the Winner’s Curse. Princeton: Princeton University Press, 2002. eBook.
Milgrom, Paul R. and Robert J. Weber (1982); “A Theory of Auctions and Competitive Bidding,” Econometrica, 50, 1089-1122.
Tu, Zhiyong. Why Do We Use the Dutch Auction to Sell Flowers? – Information Disclosure in Sequential Auctions. Diss. The University of Pittsburgh, 2006. Web.
REFERENCES