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Auction Basics

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Book cover Understanding Auctions

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Abstract

An auction is a market mechanism, operating under specific rules, that determines to whom one or more items will be awarded and at what price.

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Notes

  1. 1.

    Sellers can use auctions to determine the selling price and the winners (highest bid) of an auction, forward auction. However, buyers can also use auctions to buy items from the seller who makes the lowest offer, reverse auction, such as those conducted by governments (procurement auctions). This manual, unless otherwise noted, discusses different models of auction mechanisms in which the item is awarded to the participant who made the highest bid; in other words, we focus on forward auctions.

  2. 2.

    If there are two bidders with the same highest bid b i ∗ = b j ∗, the seller must establish a rule to solve the tie and award the item.

  3. 3.

    In a single-unit auction with n bidders, X = (X 1, …, X n ) is the vector of the real-valued informational variables (or value estimates or signals) observed by bidder i. S = (S 1, …, S m ) is a vector of additional real-valued variables which affects the value of the item. Bidder’s i value of the item is denoted by V i  = u i (S, X). Furthermore, these authors assumed that \(u_{i}(S,X) = u(S,X_{i},\{X_{k}\}_{k\neq i})\). Therefore, S affects bidders’ values in the same way and each bidder’s value is affected by his rivals’ signals. If bidders have private values V i  = X i . In the case of common values V i  = S 1.

  4. 4.

    Also known as opening bid or minimum bid.

  5. 5.

    Shill bid, also known as bid padding, is prohibited in most auctions.

  6. 6.

    As will be shown in Chap. 2, the auctioneer can set different pricing rules, so that the selling price does not always match the highest bid.

  7. 7.

    In multi-unit auctions the seller’s revenue is the sum of the prices paid by all winning bidders, as will be shown in later chapters.

  8. 8.

    From this point forward, bidders are assumed to be risk neutral unless otherwise indicated.

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Authors and Affiliations

  1. Department of Applied Economics and Economic History, UNED University, Madrid, Spain

    Asunción Mochón

  2. Department of Computer Science Artificial Intelligence, University Carlos III of Madrid, Leganés - Madrid, Spain

    Yago Sáez

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  1. Asunción Mochón
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  2. Yago Sáez
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Mochón, A., Sáez, Y. (2015). Auction Basics. In: Understanding Auctions. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-08813-6_1

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