Auctions in the Modern World
When people hear the word “auction,” they will most likely think of a website like Ebay, one of several present-day examples of sellers connecting to buyers. In reality, the concept of auctions has spread to more unexpected markets and the theory surrounding auctions is now used to determine prominent players in these markets.
While we looked at private-value auctions in class where bidders do not know the value other bidders place on the item and they have independent valuations of the good, economist Jeroen Swinkels introduces the concept of a common-value auction. In this type of auction, despite buyers all having a common knowledge about the baseline value for a good, buyers decide their own valuation of the good based on private information. Thus, knowing how much others are willing to bid could change our own valuation of the good, making the theory behind the auction a lot more complicated and, in my opinion, more realistic. This leads to the “winner’s curse” which is the idea that the winner of an auction may question how much they value the good, because if they win, then they know no one else valued the good as high as they did, so they question whether the good was really that valuable to begin with. This causes bidders to bid more cautiously so they do not accidentally “overvalue” an item. Economists Paul Milgrom and Robert Wilson conducted research into the environment that a mix of private and common value auction could bring. The results were that if an auction provides more information about its product to the bidders, then the effect of the winner’s curse is lessened since potential bidders are not as worried about making bad decisions with how much they value the good. The key point is that bidders will bid more aggressively and thus, this kind of auction will end up with a higher payoff for the seller on average.
Finally, we can take a look into the many markets that auctions have played a part in. One example is radio-spectrum auctions, such as cellphone services companies competing to buy rights to broadcast at certain frequencies. An interesting characteristic of these kinds of auctions is that it is a “combinatorial auction” where bidders care about getting a certain combination of goods being sold. In the cellphone company example, companies desire the ability to be able to broadcast over a continuous geographical region (and so do we as consumers, otherwise we would have horrible service all the time!). In this auction then, the seller (the FCC in this case) auctions off the rights to these areas simultaneously. Other areas in which auctions are now being used are for selling pollution rights in an attempt to combat climate change and global warming, and ad-competition for search engines such as Google.
Source: https://insight.kellogg.northwestern.edu/article/auction-theory-uses