Subject 4. Auctions

Auctions can be used to arrive at equilibrium price.

  • Auctions can have bidders trying to buy an item (e.g., Christie's, eBay).
  • Auctions can have bidders trying to sell an item (e.g., Procurement, priceline.com).

Auctions can be classified as one of two types:

  • Common value auction: the value of the item is the same to everyone but different bidders have different estimates about the underlying value. Examples: oil, timber, items with resale value.
  • Private value auction: bidders know the value of the item to themselves with certainty but there is uncertainty regarding other bidders' values. Examples: collectibles, art items.

There are also many different methods for auctioning items:

  • Open outcry English (ascending price) auction: The auctioneer starts at a reserve price and increases the price until only one bidder is left. That bidder wins the auction at the current price.
  • First-price sealed-bid auction: Everyone writes down a bid in secret. The person with the highest bid wins the object and pays what he bids.
  • Second-price sealed-bid (Vickery) auction: Everyone writes down a bid in secret. The person with the highest bid wins the object and pays the second highest bid (used for stamps and by Goethe).
  • Dutch (descending price) auction: The auctioneer starts at a high price and decreases the price until a bidder accepts the price.

The winner's curse means that the winner of an auction will frequently have bid too much for the auctioned item: you win, you lose money, and you curse.

A Dutch auction share repurchase is when a company agrees to buy back a fixed amount of its outstanding shares within a certain price range. Offers come in from investors who specify the price within the given range at which they'll sell their shares. The company then buys back the shares of those who bid the lowest first and continues on up the line until they have bought back the amount that they said they would.

The U. S. Treasury security auctions are conducted using the single-price auction method. All successful competitive bidders and all noncompetitive bidders are awarded securities at the price equivalent to the highest rate or yield of accepted competitive tenders.

Practice Question 1

In a sealed bid auction, the item is sold to the highest bidder for the actual bid price. This is called a(n) ______.

A. English auction
B. Dutch auction
C. first-price sealed-bid auction
Correct Answer: C

Note that the English auction is NOT a sealed-bid auction.

Practice Question 2

The U.S. Treasury uses a(n) ______ to sell its securities.

A. English auction
B. American auction
C. Dutch auction
Correct Answer: C

The U.S. Treasury uses a Dutch auction variation to sell U.S. Treasury securities.

Practice Question 3

When bidding for U.S. Treasury securities, all non-competitive bidders will pay at the price that is ______.

A. the average of all competitive bidders'
B. the lowest to clear the market
C. the highest to clear the market
Correct Answer: B

Practice Question 4

There are two types of auctions. They are ______.

I. private value option
II. public value option
III. common value option

A. I and II
B. I and III
C. II and III
Correct Answer: B

The categorization depends on whether the value of the item being sold is the same to each bidder or is unique to each bidder.

Practice Question 5

The single-price auction method used by the U.S. Treasury is a variation of the ______.

A. English auction
B. American auction
C. Dutch auction
Correct Answer: C

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