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First Price, Second Price (Red Price Blue Price?)

As we’ve learned in class, first-price and second-price auctions require very different dominant strategies in order to get the best payoff. This is why it is so important that a potential bidder look at the details of an auction’s mechanisms beforehand– however, a lot of advertising programmers don’t provide this kind of transparency. According to this article, it is often impossible for bidders to know whether they are really bidding on first-price or second-price auctions, even if the company running the auction originally claims one way or another.

Bidding with a specialized dominant strategy is very important. This article says that bidders should bid high in a second price auction, but as we learned in class this is actually incorrect. In a second-price auction, the dominant strategy is to always bid one’s true value (the maximum amount you would be willing to pay for the item at auction.) This way, a bidder will never receive an item for more than what they are willing to pay, and won’t lose the item to someone who values it less than them. However, bidding a true value in a first-price auction isn’t always the way to go. If you win the item for your true value, you get no discount at all, and therefore have no incentive for participating in the auction as opposed to buying something at a fixed price in the first place. Therefore, it is always smart to bid a little low in a first-price auction.

When bidders aren’t shown the whole picture and given the rules of the game fairly, there’s no way they can make smart choices. Bidding becomes gambling. According to this more recent article, some programmers are making efforts to become more transparent, but not all businesses provide this information.



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