Application of auction theory in the context of the Indian Premier League - Essay Example

? Application of auction theory in the context of the Indian Premier League [Faisal Khalid] [Dr Fred Day] [Principles 3] [22/03 Contents Introduction page 3 Auction types page 3-8 English Dutch Vickery Other types Main principles of auction theory page 9-10 Auction design page 10-11 Pareto efficient Profit maximization Bidding strategies pages 11-12 Behavioral economics page 12-13 Game theory page 13-15 Problems with auction page 16 Indian premier league (IPL) page 17-20 Application of auction theory to IPL page 20-22 Conclusion page 22-23 References page 25-28 Appendix page 29-31 Introduction: In economical terms, auction is a process which follows a systematic approach for selling products with the help of bidding strategies. Economists have presented an auction theory to demonstrate the role of actors and elements associated with the organized strategy of selling and buying commodities and services. This theory is highly essential from a theoretical, empirical and economic perspective. This paper aims to discuss the main principles of the auction theory along with the considerable issues and their solutions associated to the phenomenon of auction market. For this paper, we shall consider an example of the Indian Premier League (IPL) to relate it with the relevant theoretical principles of the auction theory. Auction Theory: Auction theory is a branch of economics which takes a number of concepts into analysis that includes the risks, behaviors, challenges and activities of bidders within the auction processes. The process of auction has been used from earliest traces of economic activities. Economists have contributed in the auction theory including Vickrey (1961), Griesmer, Levitan and Shubik (1967) etc. Extension of Auction theory is referred to as theorem of revenue equivalence (see appendix 1.1). As per the contributions of different economists, there are four standard types of auctions. These bids are commonly known as the English Bid, the descending bid which also known as the Dutch bid, first sealed bid and a second seal bid. Each one is unique and possesses interesting factors, which grasp attention of the interested buyers (Besanko and Braeutigam 2000). Now we shall analyze each type of bid separately supported with relevant examples. English Bid: According to Gul and Stacchetti (1999), English bid is a type of bid that slowly goes higher. Sometimes this type of bidding appears as most simplistic, however at the same time it can create complexities for both buyers and sellers. English auction begins with a bid which is placed by an auctioneer who places the starting bid which is a given price of the product being sold. The bids are then placed one by one in an increasing order. English bid is different from other bids such as sealed bids because it is open to all bidders with no policy of hiding (Gul and Stacchetti 1999). The one who makes the highest bit wins the product. In this type of bid prices increase comparatively with small margins and the buyers intend to win the item at low price than its original value at which the product bidding started i.e. starting bid. For example, there is a likelihood of quick sale of a car during an auction as the standing bid will be lowest, which will be affordable for a single buyer, who will finally take the commodity home (Auctus Development, Inc, 2004). It should also be noted that the English auction can be win by the standing bidder which can only be displaced by a competitively higher bid than the standing bid (Jaiswal 2010). Furthermore, Klemperer (1997) noted that English bids or ascending bids are usually used for selling household items such as cars, appliances, furnisher and sometimes properties as well. This type of bid facilitates sellers to make great sum of money and an amazing opportunity for the buyers to win the bid (Klemperer 1997). A reserve or minimum price is charged for house hold commodities in English auction (Auctus Development, Inc 2004). Dutch Bid: According to Besanko and Braeutigam (2000), the Dutch system is entirely different from English bidding. In Dutch biding the bid is descending and it is also known as investment bidding (Besanko and Braeutigam 2000). At the start of Dutch bidding the commodity is placed at a very high price and then gradually the price started decreasing and the one that calls out first wins the bid. According to Klemperer (1997), in this type of auction decrement is fixed and the one who shows willingness to buy product at last announced price. It should be noted that the technology has given strength to this system thus, it has observed that nowadays, the vogue of online bidding has become very popular and has provided opportunity to people to participate in the auction through online sources (Klemperer 1997). According to Maskin and Riley (1961), the most common commodities which are sold off through Dutch bidding include flower pots and flower cuts. This auction has got its name from Dutch flower auction, however which is also synonymous to clock wise auction (Maskin & Riley 1961). The basic process includes information about flowers and images are projected to the bidders. When the flowers are auctioned out they are sent to warehouses for sale. Transparent pricing system avoids the collusion of big parties who upholds the stocks of flowers (Ticker Managment Talk 2009). According to (Varian, 2006), bidders in Dutch bid collectively sit around the table in a room, which has buzzers attached to each seat and all the required information of the commodity and the price is displayed in the centre through a clock (Varian 2006). In Dutch bidding, it is necessary for the bidders to wait for the prices to fall (Riley 2000). As soon as, the bidding starts people ring their buzzers and lights flicker around the clock. As bidders start quitting the competition the number of lights start decreasing, indicating the number of people still active in the bid (Klemperer 1997). First Sealed Bid Auction Under first sealed bid auction the bidders give their bids in a concealed manner to the seller. This type of auction takes place in two steps in which all bids are submitted in the bidding period and then in the resolution phase once all bids are collected and compared the auction is awarded to the bidder with the highest bid submitted. This type of auction is different from English bidding as the later allows open or called bids (Milgrom andWeber 1982). Vickrey Bid: According to Jehiel and Mohlodovanu (2000), Vickrey auction is another type of auction, which is also known as silent auction. This auction is conducted in a written manner as each bidder makes a bid by writing it on a paper without knowing the bidding amount of other bidders present (Jehiel and Molodovanu 2000). It is done by encouraging and persuading buyers in an efficient manner. According to Vickrey (1961), this type of auction the amount paid for the product is equal to second highest price made in the auction (Vickrey 1961). Commodities, which are usually sold through this type of auction, include mp3 player, DVDs and other handy and valuable gadgets (Milgrom 2004). Although the Vickrey system of auctioning is not a perfect approach, but with the time online auctioning has become very common and useful for both consumers and sellers (Riley 2000). Double Auction: According to Lipczynski and Wilson (2009), double auction is a different sort of auction in which bidders and sellers bid for the item in an irregular order (Lipczynski and Wilson 2009). In this type of auction bid increases and offer decreases simultaneously that’s why it is called double action. Therefore, the bid-ask extend will constricted till one of the offer is accepted (Sadrieh 1998). Sadrieh (1998) states that intellectuals have further elaborated that double bid is a systematic approach of selling things in which consumers appear as competitive bidders and seller participate to make competitive offers (Sadrieh 1998). It is done in opposition with the counter market and to maximize the profit. Additionally, in this type of bids trades are negotiated in order to make most of the opportunity in the double auction market. This type of auction is also termed as open outcry because buyers and sellers both announce their offered prices and if the prices matched, then they deal with each other (Schneider 2010). McAfee and McMillan (1987) also noted that an important feature of this auction is that homogeneous products are offered by the sellers, however, this auction includes a large variety of products ranging from small household commodities like show pieces to heavy industrial machineries (McAfee and McMillan 1987). Other types of auctions There are some modified variations to the types of bidding mentioned earlier that are in practice too (McAfee and McMillan 1987). In some cases a certain amount of price is kept as a reserve if the bidders observe that the price of bids is generally lowers than standard. Sometimes a nominal fee for entry is also charged by auctioneers (McAfee and McMillan 1987). Milgrom (1989) also contributed in auction theory by stating that sometimes depending on the nature of the value associated to the commodity a minimal amount of bid is charged from all bidders. In escalation auction a certain amount is given to the winning bidder let’s say $2 and then a certain percentage of the winning bidder belongs the person who paid (Milgrom 1989) Escalation Auctioning According to Lucking (2000), escalation auction in which the bidder paying the highest amount wins the item being auctioned but the highest and second highest bidder have to pay the amount of the bid. For example if an escalating auction is taking place and there are two bidders X and Y (Lucking 2000). X bids 20 dollars and Y bids 10 dollar (Shubik 2012). The auctioneer is going to get the sum of both their bidding amount and the commodity will be won by bidder X whereas bidder Y will get the 1/10 part of that commodity or dollar bill (Shubik 2012). Proxy bidder This is a type of bid which follows the automated bidding system. This concept is practiced by the famous bidding online company EBay. At EBay the bidder is required to enter in the maximum amount he can pay for bid. This amount is discreet information and is not disclosed keeping it as maximum limit (EBay 2012). When the biding starts EBay gradually increases the price of the bid for the bidder and tends to stretch it to the maximum limit and make the bidder win before it crosses the line of maximum limit. If another bidder crosses the maximum bid set by one bidder EBay automatically informs them to increase their limit too (EBay 2012) Main Principles of Auction Theory There is a lot of asymmetrical information involved in bidding and there are two main models of auctioning. a) Private value model b) Common value auction According to Klemperer (1997), in private value model the bidder that tends to opt for bidding is fully aware of the value of the product but does not tend to make public news of the value but rather keeps it to himself (Klemperer 1997). According to Milgrom (2000), in common value auction the product being offered is of standard value for all but some bidders have generally more information than the other bidders which increases the value for some bidders while at the same time it can also decrease for some (Milgrom 2000). A good site locating for a mall can be a very good example for understanding this type of bidding. In this considered situation, bidders would know that the area has higher costs of construction while some would know that how much easy it would be to access the natural raw materials of water, electricity and gas in the area. In such as instance the value of the site to the bidder would instantly change (Klemperer 1997). According to the study by Goerre and Offerman (1999), it was noted that there are signals involved in such scenarios whereby bidders change their assumption of value because of the action of another bidder. In both these models it is also pretty common that sometimes the information and value for bidders varies because of the insight provided by the competitive bidders in the game (Goerre and Offerman 1999). In some biddings a combination of both the variables are used. In such a scenario the level of efficiency is generally increased with the increased number of bidders (Goerre and Offerman 1999). Auction design Pareto Efficiency Pareto Efficiency states that if inputs and outputs cannot be reallocated into producing something else then they are said to be Pareto Efficient. Pareto efficiency could be attained by first price sealed bid and second price sealed bid. Bidders make use of two concepts as a way to analyze the type of auction that will be more suitable to them (Shubik 2012). This is done by calculating Pareto efficiency and profit maximization. As per Pareto efficiency, it is evident that the product must be sold to the person who has placed the highest bid. An auction protocol can be referred to as Pareto efficient at the time of dominant-strategy equilibrium i.e. a balance between all participants of the auction in terms of surplus (Goerre and Offerman 1999). Profit maximization In all types of auctioning the auctioneer looks for the bidder with the highest value and the one possessing the highest level has the greatest chance of winning the bid (Ely 2009). The seller has to generalize a certain amount of value in the mind of the bidder which is not possible as the value of products is variable so the concept of profit maximization is hard to apply to auctioning (Ely 2009). This concept of economics focuses on the fact that sellers who own goods that they wish to sell want to sell it at a price greater than the cost of the commodity. When the cost will be smaller than the selling price the owner will earn profit and maximizing the profit levels is the main objective associated to this concept (Ely 2009). In order to flourish this concept there are certain assumptions. First of all there should be potential buyers to the commodity and secondly the buyer should be obtaining some amount of value from the purchase (Ely 2009). Locating the buyer that has the highest value to offer is the aim of the seller (Ely 2009). Bidding strategies According to Vickrey (1961), the basic bidding strategy relates to common items such as accessories and household items. In such bidding checking on the competitive bidder’s strategy and relevant information available is very essential (Vickrey 1961). Especially in common value bidding it is highly important. It is always feasible to check on the number of people going for the bid (Auctus Development, Inc 2004). In terms of practical implication, a good is sold with a common value or a private value. In each scenario the lesser the number of bidders the more probability there is of having a good amount to win at. In private value people do not check for reserve prices are in such scenarios having the reserve price kept secret is the best option (Auctus Development Inc 2004). Other Types of Bidding Strategies Aggressive Bidding Strategies Aggressive bidding strategies are the ones in which the bidder have a notion that the bidding is about to wind up and the number of interested bidders would increase. The special strategies designed for such a case should be implemented in the very start of the bidding session in order to avoid setbacks of jump in bidders (Myerson 1981). Strategy of War of Attrition This is a concept whereby the bidders want to keep continuing the bidding process so that the bid is not won by another party. For this the timing and the effectiveness of the bidders should be to the highest level and the internet should be used as the best medium to check on updates. Since it is an automated bidding so the other bidders have to keep the bids going on till the automated bidders are exhausted and wish to quit (Myerson 1981). Sniper Bidding This is a rare type of bidding in which people opt to bid when all the main competitors have resigned from the bid and the auction is started from a very few items. When the aggressive bidders leave the game, other bidders jump in and start the bidding (Myerson 1981). First in Bidders In this strategy several bids are placed in the same auction so that the probability of wining the bid increases. Sometimes people believe in winning a complete pack so they go for this type strategy (Myerson 1981). Strategy of Power Bidding Availability of funds and various strong techniques are the main force drivers of power bidding. Through this strategy people tend to win various types of bids at the same time (Myerson 1981). Strategic behavior and behavior economics Sense of loss can be termed as a behavior of a bidder during an auction which makes the bidder to pay more than the optimal value of a good. It is because the bidder believed and feels that he would not be able to bid for the product later as it will be at loss. Bidding becomes avid and quick in terms of auctions. This concept of economics of strategic behavior and behavior economics is pretty similar and they define how people behave more intuitively in auctioning and bidding activities (Kahneman 2003). It is more of a judgmental decision and majority of the decisions made by the bidders are done on the spot. Late bidding is a concept of this similar theory whereby on sites such as eBay may lead to overpaying for a good as you get carried away and sense a loss if you were the leading bidder initially. So going by a strategic option seems to be a more practical approach (Kahneman 2003). Collusion The concept of collusion supports the second price bidding more than the other types of bidding. Suppose that in a situation that there are two commodities of equal valuation and two bidders. A similar stance has been posed by Saphores (2006) stating that collusion is in the favor of second bidding (Saphores 2006). One of the bidders wants to win over the two bids and the other one wants to win over one of the bids. In such a situation collusion can be reached and the higher bidder can pay more while the second one can pay by zero for the bid and win according to the situation that they both desire (Klemperer 1997). Game Theory and Repeated Game Theory Game theory allows clear understanding of the decision-making process that is undertaken by a bidder during an auction process. According to Goerre and Offerman, It is a mathematical evaluation of the decision-making that is affected by factors which are considered as variables (Goerre and Offerman 1999). Game theory suggests that the practice of auctioning is just like a game whereby the players are indecisive of the choices they have and the situation is presented in front of them. There are many aspects related to this theory that will be discussed furtherer (Lipczynski, Wilson and Goddard 2005). When this game is played in multiple settings numerous times by players then it is named as repeated game theory. Each player possesses a special strategy to go about the game (Lipczynski, Wilson and Goddard 2005). Each player focuses on applying a strategy that maxims his return on in other words payoff. In order to defend their payoff each bidder tries to compete against the other and protect their private information regarding the value of the product (Lipczynski, Wilson and Goddard 2005). While auctioning players can get into a co operative game and settle the bid agreement or be incorporative and go by the competitive method. All of this has a direct effect on the final decision that is to be made by the end bidder or firm. On the basis of the information and resources available and acquired the final decision is calculated (Lipczynski, Wilson and Goddard 2005). Nash equilibrium This is a concept whereby none of the strategy lets the other bidder earn a good pay off. This concept directly relates to the concept of equilibrium in economics whereby the costs equal the revenue and there is a no profit no loss situation (Lipczynski, Wilson and Goddard 2005). The impact of Nash equilibrium on auctioning is that it tends to de-motivate players to participate in the practice of auctioning again. Plus it also tends to finish the concept of any surplus value or extra added pay off for the bidders participating (Lipczynski, Wilson and Goddard 2005). Figure 1 Pricing of players and Quantity of matches Source: (Lipczynski, Wilson and Goddard 2005) This graph plots the quantity of matches played on the y axis and the price of each player on the x axis. Suppose there are two players being auctioned, so when the player one and player two coincide then it is the point where equilibrium is established and there is no profit no loss situation expected (Lipczynski, Wilson and Goddard 2005). Prisoner’s dilemma This concept curtails to the phenomenon that each bidder is provided with competitive strategies to compete in the auctioning (Lipczynski, Wilson and Goddard 2005). All of these strategies are focused upon maximizing pay offs. A good result can be achieved if collusion is carried out between the two parties bidding but most commonly collusion is not possible. The reason behind the absence of collusion is that each bidder plans to go about his own defensive strategy and does not focus on a bigger return (Lipczynski, Wilson and Goddard 2005). Winners curse This concept states that the bidder with the highest signal has the highest probability of wining the bid. If the external factors are not accounted for when participating in the auctioning then sometimes the winning bidder end up paying more than the reward of the commodity. In this way the cost of the bidder increases on the bidder rather than it being a profit item (Klemperer 1997). Problems with auction and its Solution: Pooling in auction markets can create problems in auctioning. The example of Australian satellite television is very important one in this regard. In 1933 there were two national channels that were working to broadcast advertising and other television programs in Australia and Finland. The regulations in Australia were much more flexible (Brown 2002). The government wanted to shift from analogue to digital communication for communication and other purposes. Due to difference of regulations in various parts it was difficult to auction out the government contract. To solve the issue Australian government shifted to Pay TV and with the passing years many broadcasting companies joined hands with Pay TV (Brown 2002). But these issues of auctions should not be created as a barrier towards selling of products. However, as a part of solution for the pooling in auction markets, it is suggested that fair value of products and services are detailed through news. This will allow the bidders to understand the value of products and services. According to Vickrey (1961), this is probable to influence the bidders to bid for the services and products. Auction activities are needed to be undertaken in economic forefront. Following English and Dutch types of bidding allows the bidders and sellers to attain services. Setting price of a product which is bid at the first place can allow sellers to add valuation to the goods and services. Increasing bids will allow the sellers to maximize their products (Vickrey 1961). Indian Premier League and Auction: It is significant to understand the connection of Indian Premier League (IPL) and auction before evaluating the applicability of auction theory principles. It should be noted that IPL was founded in India as an inspiration from Twenty20 cricket in England. It was noted that a great deal of marketing benefit could be observed by initiating such cricket leagues such as Twenty20. Indian team won Twenty20 in England in 2007 which formed the basis of Indian Premier League that was finally initiated in 2008 (Parker, Burns and Nataranjan 2008). The connection between IPL and auction is due to the franchises created for the assignment of teams to respective owners. IPL includes eight franchises which had been located in separate eight cities of India. It should be noted that the chosen cities are basically largest cities of India where auction activities can be undertaken because of higher economic activities. As per the analysis by Parker, Burns and Nataranjan (2008), the first ever auction of IPL was conducted for the purpose of ownership of franchises in 2008. The initial bid that was noted in the first auction for ownership of IPL teams was for $50m. The ownership in the first auction was given to the winner for ten years. The closing of bids in the first auction of IPL in 2008 was $67m to $112m (Parker, Burns and Nataranjan 2008). Figure 2: Value of the IPL A complete auction session for the Indian premier league is held every year before the final tournament. There is a set of two days and five sessions that takes place. Rules for auction in the IPL are that just before the season of the tournament a complete guideline is provided to the bidders and the franchisers. Normally the auction of players is a private auction and is held by Mr Richard Madley who is a professional auctioneer (Hindustan Times 2008). The format of the auction is pretty simple and is of open nature where as many franchisers as available can participate. The person offering the highest bid has to pay the highest price which is an avid principle of English auction theory. 78 players are kept at the auction and each is divided into different tiers. There are four different seasons of the overall match. Through five known rules the franchiser can obtain a player into his team (Hindustan Times 2008). The difference in bids of one player selected by the bidder has to be paid by the franchiser. Sometimes the player and franchiser collectively join hands to renew the contract amount (Hindustan Times 2008). A base player fee has to be paid by the franchiser at the start of the bidding as English auction theory states that the auction should be started with a base price. This payment is offered as a guarantee that the player will be playing throughout the tournament and in case of a mishap the amount is reimbursed (IPL 2010). An icon player is set as a representative in auctions and all of the players being auctioned have to be present at the spot. Detailed information regarding the set of players being bided is provided to the franchisers beforehand. In this schedule of the set of players each player’s specialty and identity according to the nationality is provided to the bidder (IPL 2010). The bids start from up to $100,000 or more depending on the player (Parker, Burns and Nataranjan 2008). After winning the bid a contract is signed that stays for three years. In IPL only ten teams are allowed to collude and not more than that (IPL 2010). Following are the specified rules of IPL: IPL auction should be undertaken to place bid for 11 players (playing at a time) in one franchise. Each franchise of Indian Premier League can hold four foreign cricket players at a time. The franchises can place their respective bids on the basis of salary they are willing to pay the priced and valued players. As per the auction theory implementation, the salary cap on the services of players must be $5m. However, franchises are ordained to spend at least $3.3m on players’ salaries. Salaries as offered by the bidders must be pro rates which means that in case the players is unavailable for less than 25% then the bidder still needs to pay of the 25% of the salary which will also be calculated in the overall salary cap. The salary caps are settled for three years minimum with a condition of players being transferred. The ages of at least four players in the team must be below 22years. Franchises can also make use of an Icon Player who will get 15% more salary than the net player being bid. Application of Auction Theory on Indian Premier League It will not be incorrect to state that principles of auction theory are evident to Indian Premier League as it serves a systematic auction and bidding framework. As studied in detail in the above section of this paper, principles of auction theory includes two models of bidding which are used by bidders for placing bids for services i.e. private value and common value models. In case of Indian Premier League, it is quiet evident that biddings for buying ownership of IPL teams, bidders have followed private value model as well common value model of bidding because the auction rules have been heavily based upon the theoretical principles. This has relatively increased the efficiency as the bidders in IPL are in majority (Parker, Burns, and Nataranjan 2008). The use of private value model has been observed in the “Icon Player” rule of IPL. This rule states that the players who are in the team for being associated since birth to the particular franchise (e.g. Yuvraj Singh being associated with Mohali franchise since as he was born in the district) serves as a private value advantage. This provides certainty that the player will be playing for team on a confirmed basis for being available in the franchise. It has been noted previously that IPL team ownership included biddings which were made on the basis of a player’s potential of playing in the team. This is observable in the case of Graeme Smith who was priced as $475,000 in Jaipur franchise. The bid on Graeme Smith was placed on the basis of private value basis as the franchise owners were fully aware of the capabilities as reported by the analysis of Smith’s career. The news of the value of player was however kept silent (Parker, Burns and Nataranjan 2008). Figure 3: Graph illustrating how the auction price does not always guarantee success The second model of bidding in auction theory is common value model which is also evident in the case of IPL. It has been noted previously that the bidders have placed a bid which had a common valuation for all bidders willing to buy the franchise. The winners in this case can be referred to overly optimistic. As per the rule of IPL, following the common value model, values of some players are illustrated in the news which allows the bidders to get aware of these players. In other words it could be said that the a player whose value is commonly known by all bidders will be bid after second thoughts by bidders as they will like to make a decision on their own and not influenced by the news published (Parker, Burns, and Nataranjan 2008). Another theoretical implication of auction theory on IPL is that the rule following common value uncertainty is designed in such a way that its use is becoming minimized. This will result in the minimization of winner’s curse. The concept of winner’s curse is also associated with IPL greatly. It is in the form of a team buying a player more than his worth in order to make use of services. This ideal was followed by IPL authorities in the auction of 2011. As a result, the valuation of players was increased to a large extent. IPL followed by the theoretical implication of auction theory reflects English biding system. The bidders in IPL follow English bid as their bids reach to higher percentage gradually. For instance, the base price of RP Singh was on base bid with $200,000. He was sold with a standing bid (increased and highest price) of $600,000 (Parker, Burns and Nataranjan 2008). Likewise the theoretical implication of English auction theory, there are some complexities that are observed during the auction considering the common value of players. For instance, the bidding undertaken by the Punjab team in 2011 created a complexity to generalize the common value of players such as the case Ryan Harris. For Punjab franchise, it was more complicated to bid for Ryan Harris as the collective value of all the players was unknown. It is due to these instances that the simplistic nature of English auction becomes complicated.  The aspect of profit maximization in terms of IPL auction is quiet easy to understand. As studied above that profit maximization is generalized on the basis of economic theory of getting profit. This means that a person who is the owner of a good would like to sell his product by getting better price. In case of IPL, it is evident that the auctioneers of IPL are getting maximized profits because of the teams that have been bought by franchises holding celebrity figures. The glamour of IPL and the auction with the help of English bidding (increasing manner of bidding) has allowed the auctioneer to maximize their profits (Parker, Burns and Nataranjan 2008). Conclusion: Through the above in-depth analysis of auction theory, it could be said that it is one of the most important theory of auction that can be applied in economic activities. It has been understood from the above analysis that a great deal of aspects of auction theory is being implemented on economical activities such as IPL. This theory helps in understanding of types of bids that are made on buying and selling of products and services. Considering the complex case of IPL where millions of dollars are transacted for the pricing of team players, it can be said that auction theory has relatively provided a framework for designing auction of IPL that can also be used in order cases. The auction theory analyses all the major components of the process of auctioning from the start of the bid to the selling and value evaluation of the commodity sold. The utility of the auction market is that it helps in understanding the market and how it operates on a level where commodities are sold and priced. IPL is a very unique sort of auction that makes use is predicted to become sealed-bid auction by 2012. In a nut shell it can be said that the auction theory principles are clearly evident on the auction framework of IPL. List of References Auctus Development, Inc, 2004. Auctus Development, Inc. [Online] Available at: [Accessed 28 February 2012]. Besanko, D. & Braeutigam, R., 2000. Microeconomics. Wiley, pp.593 - 603. EBay, 2012. 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