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Dynamic Bidding in Second Price Auction

On Ebay, auction listings usually last seven days. Bidders can bid at anytime during the active time of the auction and also increase their bids at any time prior to the end. However, people might have trouble while bidding with the two features. For the first one, information might arrive during the auction that can change a bidder’s value. As for the second one, bidders are often inattentive and not have full control of the timing of future bids. This article develops a general model of a dynamic second price auction that captures these two features.

In the model, agents’ bidding opportunities and values flow a joint Markov process. At each time of arrival bidders observe a new signal and choose whether to place a bid or increase a new one. The last step is the same as typical second price auction. The authors prove that equilibrium exists and is unique, providing a recursive representation and algorithm to solve for bids as a function of time and values. The equilibrium bid equals the expected final value conditional on being the bidder’s final one.

The article raises a novel second price auction consistent with repeated bidding and sniping(two observations in eBay auctions). This helps give the bidder a more applicable idea. According to the course, bidder always would like to keep staying in the bidding as long as they won’t lose money in the second price auction. However, the real auction is slightly more complicated than the theoretical auction. The authors develop a useful model to fix the trouble people might have during the unsealed bidding using dynamic idea.

http://econ.ohio-state.edu/saeedi/hs_auction.pdf

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