Flaws in Auction Format of the Indian Premier League (IPL)
Source: http://www.livemint.com/Consumer/zCpAK5lQ3wSkCUddAq0UQI/What-IPL-team-owners-didnt-learn-from-previous-auctions.html
The Indian Premier League (IPL) is cricket’s premier domestic T20 league, which started in 2008. Played in India across a 2 month period, it has captured the imagination of the public, bringing new fans to the game in a franchise based system inspired by the NFL and EPL. Every three years, international players are auctioned and sold to the franchise teams. One part of the given article discusses the problems with an auction format such as the one used to sell players in the IPL and how franchise team owners, poor players in this game, often do not choose their dominant strategy and overspend, leading to inefficiencies in the auction.
The article talks about a “right to match” bid that the team who already has the player has. For example, if we take the case of Player A who has represented team X in the past. Team X’s true value for player A is say $100. Now, two other teams: team Y and team Z also want player X on their team but their true value for player A is $110 and $90 respectively. Now, if we assume that team Y and team Z bid their true value, since this is a second price auction, the auction will end the moment Team Z stops bidding, i.e. at $90. In a normal second price auction, Team Y should have won player A and would have had to pay $90 for the player. However, the “right to match” bid gives team X (the team which has had player A in the past), the right to match the winning bid, i.e $90 and acquire the player. This is a win-win situation for team X, who not only gain back one of their players but also do so at a value lower than their true value for the player, giving them a payoff of $10. Team Y who should have acquired player A with a payoff of $20, end up with a payoff of $0 and lose the auction too. Thus, it is clear to see how such an auction very much favors the team who already had a certain player in the past. If we consider the dominant strategies of the 3 teams involved, it is clear that bidding your true value for the player is the dominant strategy for each team. Team X who already has the player, should only use the right to match bid up till the point the bid crosses their true value because and further increases in bid would simply result in negative payoffs for team X. Team Y and Z are a bit more interesting. Even though, they might be tempted to bid more than their true value because of the right to bid option that team X has, game-theoretic analysis proves that their dominant strategy too lies in bidding their true value. This is because if either of the two teams bid more than their true value and even win the player, they end up having a negative payoff and it clearly would have been better for them to lose the auction and have a zero payoff. However, the article comments on the fact that because of the right to match option available to one team, the other teams do not play their dominant strategy and bid a value greater than their true value for a player, leading to excessive amounts of spending and an unbalanced squad. Auctions are typically characterized with teams spending huge amounts for the initial set of players and because of their overspending end up spending less for players that come up later in the auction. As a result the players themselves do not get paid as much as they should and the teams suffer as well.