Chapter 15: Auctions

Overview

Be not too hasty to outbid another.

Proverb^[1]

While auctions have always interested game theorists, the Internet has recently made them relevant to more ordinary mortals. Indeed, the on-line auction provider eBay has be-come one of the few profitable pure Internet companies.

Auctions reduce the cost of ignorance. A seller unaware of how much customers value his good normally faces a dilemma: He can set a high price and risk his good going unpurchased, or set a low price and, alas, get low prices. When auctioning goods, however, the seller need not determine the optimal price, because in auctions the price of goods automatically changes in response to buyer demand. Auctions are especially valuable to sellers of time-limited products like airline seats and hotel rooms. If you sell durable goods and set too high a price, you always have time to resell the items. If, instead, you sell a time-limited product but find no buyers, then the item is forever lost. Since auction prices will automatically be reduced until the market clears, auctions almost never leave you with unsold merchandise. The two most common types of auctions are first price sealed-bid auctions and second price sealed-bid auctions.

^[1]Browning (1989), 360.