Auctions and Bidding: A Primer

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.