Game Theory in the Auction to Buy Sky
https://www.wsj.com/articles/blind-auction-complicates-bidding-for-sky-1537522201
The first article above talks about game theory in the context of an auction, something that we’ve discussed in great detail in class. The situation being discussed in the article in the auction to buy Sky, a media company with a stock-market value of $36 billion. There are only two bidders that were competing for the company Comcast Corp a and a team of Walt Disney Co. and 21st Century Fox. The auction was set to be a day long affair with multiple rounds. Comcast and Fox/Disney had already submitted initial bids of 14 pounds per share by Fox/Disney and 14.75 pounds per share by Comcast. The auction is a first price auction with three rounds. In the first round Disney/Fox has an opportunity to bid, because Comcast has the initial higher bid. If Disney chooses to bid in this round there is a second round where Comcast gets the opportunity to bid again either higher than Disney/Fox’s new bid, or equal to it. If they bid higher they win. If they choose to submit an equal bid the auction moves on to round three where both companies submit secret bids for a blind first price auction. An added complication to this auction is that Disney/Fox already owns a portion of Sky so even if they don’t win they want the price to get as high as possible so they can sell their Sky stake for higher.
I thought this was an interesting example of how the things we are learning in this class are things that are used in real life in real and high stakes situations. This also was a simple enough example that I was able to think through the basic strategy that the two companies would most likely be using. The way the auction is set up leads to no dominant strategy for either company. The third round – the blind first price auction – is especially difficult, because neither company knows what the other is bidding or values Sky. It doesn’t make sense for either company to bid higher than their value of Sky. The article points at that the main concern when participating in this kind of auction is raising the price so high and end up having to pay, therefore it makes sense for both companies to bid below their value of the company, but above what they believe the other company is bidding, which will hopefully lead to a positive payoff for the company if they win. Auctions in the real world depend greatly on making sure you have a clear value of what your bidding, which is not as black as white in the real world as it is in the examples we do. It is also important to have an estimate of what the other company values the item for sale at to try to gage where you should bid.
According to the second article listed above Comcast ended up winning in the third round with a bid of 17.28 pounds per share, over Disney/Fox with a bid of 15.67 pounds. This means that Comcast could have gotten the company for significantly cheaper than it actually did, but probably still ended up with a positive payoff assuming they bidded lower than their value of the company.