Designing Propper Made Auction - Essay Example

Element bidders can use the early stages to their advantage, since the prices then are low, to decide amongst themselves who should win which objects and then agree to stop pushing up prices.

To overcome this weakness there is a need for a stronger auction design. Ozment addresses this issue of collusion, pointed out by Klemperer, by categorizing them into two major areas of concern in the vulnerability market. The first is employee-tester collusion, which comprises the possibility that a competitor pays an engineer to insert a backdoor into the program and hence increase its vulnerability. The second is tester-tester collusion, in which testers could agree not to submit reports until the price works in their favor. Having acknowledged these problems Ozment also proposes certain solutions to mold auction design to minimize the occurrence of collusion. By not making public the number of testers a limit can be imposed on their ability to collude and control the auction. It can further prevent colluding groups to form and then identify and punish an opposing member through retaliatory bidding. Also by having testers register in advance with a third party, the auction provides incentives, in the shape of reduced registration charges, for individuals who are actively planning to test the product and claim the reward. This reduces the chances of employee-tester collusion.

The second area of concern as pointed out by Klemperer is entry deterrence. For a successful auction design, there must be enough participants in the bidding to result in profitable outcomes for the auctioneer. Some barriers to entry are in the form of high entry costs, ‘the winners curse’, and asymmetry of information. The issue of entry deterrence eventually leads to, the third main issue, predatory behavior as some bidders receive a modest advantage over others. Ozment proposes the incorporation of an initial value of the reward in the auction to be of a high level to combat this issue. This creates an incentive to kick-start the first few auctions in the series by bringing in a large number of testers. Furthermore, it lowers the entry costs for participants in future actions in the sequence. Another solution proposed is by incorporating a reputation reward along with the monetary reward will increase the participation of the bidders as well as effectively discourage predatory behavior.

Some other factors such as reserve prices, political problems, loopholes, the credibility of rules, and market structure are also mentioned by Klemperer. However, Ozment proposes structural suggestions to strengthen auction design by inserting stronger elements of cultural, legal, and managerial tools during the sequence of the auction. Looking at all the above-mentioned details it is effective to conclude that it is possible to design an auction as mentioned by Ozment while keeping in mind the factors mentioned by Klemperer.

Despite undertaking the development of an auction design keeping in mind the strong enhancements suggested to strengthen it by Ozment, there are still a lot of perverse incentives that might be created. If we look at the fact that the key barriers to auction design are collusion, entry deterrence, and a general buyer market power it can lead to the conclusion that design may not matter very much when the entry for a big number of potential bidders is made easy. This can be viewed by looking at the example of government security sales in which auction design does not matter much for either price or efficiency. Some perverse incentives that might arise for the producer as termed by fundamental problems by Ozment are in the form of increased expenses, reputation concerns, copyright infringements, vulnerability security, and loss of free trading.

Some other perverse incentives in terms of attacks by the producers might also arise. Not paying for bug reports, taking measures to reduce the payout to a bidder, shortening the length of the auction sequence, rearranging a large award, and using a false R0 kick-off of the action sequence.

A strong bidder in an ascending auction can use the price as a tool to end the auction quickly at a low price or by forcing it up to drive out weaker bidders. This creates a situation in which price serves as a factor of discrimination for weak bidders in an auction. Furthermore, the factors of first-sealed bids auctions and second-price sealed-bid auctions where the amount bid by each bidder is not disclosed until the winner is announced the element of perfect price discrimination is also noticeable. In the first-price sealed bid in which each bidder places their bids based on their level of perceived value and information regarding the product, we notice the variation in the prices after the bids are disclosed. In certain cases, the gap between the winner and the runner-up is so vast that it leads to the creation of an element of perfect price discrimination. Similarly in the second-price sealed bid auctions where the winner has the option of choosing to buy the amount prescribed by the runner up a similar situation regarding the price is created. Read More