Ticket Master – Why First Price Auctions Are It’s Only Option
Reference Material: Hyperlink
Within a first-price ascending bid auction, bidders engage with the seller as the seller slowly increases the cost of the product until all but one bidder remains. Within the Ticket Master sales model, after the completion of each auction the site charges the user a series of service fees that include facilitation, insurance, and shipping of the ticket to the purchaser. However, the average first-time bidder usually remains unaware of these additional fees as they are not highly displayed on their sites main page. However, it is essential that the site can get the winner of the auction to authorize these charges. Otherwise, the auctions would have failed, and the site would not be able to collect any service fees, leading to reduced revenue streams.
Thus, Ticketmaster must utilize the first-price auction format so that fewer bidders abandon their winnings. Within a first-price auction, bidders shave down their bids to be slightly less than their true values for the product, as bidding their true value is not the dominant strategy within a first-price auction (Demonstrated in Figure 1). Contrastingly, in a second-price auction, the dominant strategy is for bidders to bid their true values, for the product, as it is most likely to maximize the user’s overall value. However, when the site suddenly adds hidden service fees, bidders within the second-price auction are more likely to have to abandon their winnings than bidders in a first-price auction.
This is because bidders in a first-price auction have a dominant strategy to never bid equal to or higher than their true value and thus always have a slight window between their true values and how much they bid in the auction. Therefore, Ticket Master can charge additional fees, and the resulting cost of the ticket would remain lower than the bidders’ true value (as demonstrated by figure 2). Contrastingly, since bidders in the second-price auction do have a dominant strategy to bid their true-values, they face the possibility of paying their true values if the second-highest bid was equal to their bid (as demonstrated by figure 3). If this were to occur, the bidder would have to forgo the opportunity and not authorize the final charge, resulting in an auction failure. Knowing this, Ticket Master implements a first-price auction within their online markets. This way, when they introduce their hidden fees, bidders are more likely to still acquire the product as the shading down which occurs in first-price auctions increases the likelihood that the resulting price would still be below the bidder’s true value for the product (as demonstrated in Figure 2). Thus, within the Ticket Master bidding model, it would be highly unadvisable to utilize a second-price auction system.
