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Second Price Auction in real life

Second price auction is an interesting form of auction. The dominant strategy is to bid your true value. Thus, it motivates bidders to bid their own value. We can view this in another way: second price auction is a way to figure out how much an item is truly worth for each bidder. You cannot do the same for first-price auctions or third-price auctions because the dominant strategy is different. This logic applies to online auctions as well. As long as it’s a second price auction, each bidder should bid their own value. I learned that the dominant strategy of second-price auction is to bid your own value because of how the auction is organized. However, what would happen if the auction was not structured this way?

Nowadays, it is very easy for people to participate in auctions through the internet. Ebay is a common website that users use to participate in auctions. Although the website explains how they are going to run the auction, how can users be sure that the website actually runs it in that way? I found an article that discusses about this issue. It describes auctions as a “black box.” Once a bidder bid their prices, the next thing that he or she will see is either a win notification that depicts the clearing price or a message indicating that he or she did not win the auction. The bidder has no idea what the website is actually doing “behind the scenes.” I thought this article was coming across an interesting point. If the website is somehow manipulating the auction, then the dominant strategy would change. If a website is running a second-price auction, should you bid your own value? If that website is completely trustworthy in the fact that it will actually run a second price auction, then the answer is yes. However, if the website is not trustworthy, then the dominant strategy might not work well. For instance, a website might lie that they are conducting a second price auction. They might be driving up clearing prices in the process. In that case, you would not be paying the second highest bid, but rather the clearing price that the website set to. If that is so, would bidding your true value be a dominant strategy? I think not.

This article opened up my eyes to see how some materials that I learned in lecture actually applies in real life. I learned that in a second price auction, you should always bid your true value. However, in real life, there can be other factors. A website might manipulate the auction so that it can raise its profit. I learned that I should not blindly bid my true value but consider if the website can actually be trusted or not. If it can be trusted, I can bid my true value. If not, then I might as well find a more trustworthy website to participate in the auction.


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October 2017