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From Second to First: The Changing Face of Auction Dynamics

https://www.exchangewire.com/blog/2018/03/20/second-first-changing-face-auction-dynamics/

 

In our in class discussions of auctions, we have established that second-price auctions are the most common type of auctions seen in widespread use. Second-price auctions promote bidders to bid their “true values,” and in the ideal worlds discussed in game theory, that is the dominant strategy that holds true for all second-price, sealed-bid auctions. However, in the blog post by Lindsay Rowntree, she talks about a discussion over the shift in auction dynamics – moving from second-price auctions to first-price auctions. As stated in the article, from an economics standpoint, the second-price auction does indeed promote the best behavior from both buyer and seller – bidders are willing to bid at their maximum values, knowing that the market demand will decide which price is the best amongst those, and incentivised to bid their true value while still retaining “profit” due to only needing to pay the second-price.

Then, what’s the main issue with second-price auctions? In class, we were discussing auctions in the context of an ideal, game theory world. However, in the real world, things are not quite as simple as always having a dominant strategy to play in a second-price, sealed-bid auction. As stated in the article, there are also pitfalls to second-price auctions in online display, as there is often a surplus of supply versus demand, causing a lot of “auctions” to only have a single participant, and the second-price model makes it easy for companies in the middle to hide fees from both the buyer and the seller. When auctioning in the real world, the complications between humans starts messing up the ideals from game theory. Transparency becomes an issue as people tend to greed for selfish gains that they believe others will not notice. If the companies in the middle “tax” the buyers and the sellers, then these fees imbalance the ideal of a second-price auction. Without a consistent demand, the ideal of second-price auctions also fall apart. Despite the conclusions we comprehend through the understanding of economics, the intricacies of human interactions still remains quite a fascinating issue.

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