Auctions - Microeconomics 3rd Year - Essay Example

As the auction proceeds, the price starts declining. A bidder can stop the auction at any time, claim the object, and pay the ongoing price. This particular type of auction is also described as a descending bid auction and has been traditionally used by the Dutch in flower markets. This is the most commonly used format. Bidding starts at a low price. The bidders compete by submitting ascending bids until only one bidder is left. This bidder wins the object and pays the ongoing price. It is the opposite of the Dutch auction and is described as an ascending bid auction.

The eBay auction is a variation of this type of auction. This mechanism is similar to the first-price sealed-bid auction, with the exception that the highest bidder pays the second highest bid. It is also referred to as the Vickrey auction. It is seldom used but is commonly used in theoretical work because of its simplicity and closeness to the English auction. The Dutch auction and the first price sealed bid auction are strategically equivalent regardless of the information structure (independent private value or common value) and risk preferences (risk neutrality or risk aversion).

A strategy is a complete description of instructions to be played throughout the game. The strategic form of a game is the set of alternative strategies to each player and their corresponding expected payoffs from following them. Two games are strategically equivalent if they share the same strategic form. In a Dutch auction, each bidder needs to decide at which price he would want to claim the object, assuming that it is still unclaimed. This is also true for the first-price sealed-bid auction.

When a bidder is in a first-price sealed bid auction he thinks about whether to bid £95 or £100. He is actually trading off winning with a lower bid between £95 and £100. This is exactly the same considerations that are given in the Dutch auction. The English auction and the Second-price