MANAGERIAL DECISION MAKING

C.  Auctions and Competitive Bidding

Posted prices - - auctions - - negotiated prices

• Need differentiated product

• Better than posted prices because competition among buyers drives price up

• Better than negotiated prices because multiple buyers increase likelihood of high bid, forces buyers to bid close to true value

1.  Types of auctions

a.  English auction - ascending bids, highest bidder gets item

b.  Vickrey or second-price auction - bidders submit sealed bids, highest bidder gets item at the second-highest bid

c.  Dutch auction - price starts high and then drops until a bid is made

d.  Sealed-bid auction - item goes to bidder with highest sealed bid

2.  Strategies

a.  English auction

• Bid up to buyer's reservation price

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• English and Vickrey auctions give similar results

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b.  Dutch auction

• Uncertainty about when others will bid

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• No opportunity to make a counter bid

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• Dutch and sealed-bid auctions are equivalent

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b.  Sealed bid

• Need to anticipate distribution of competing bids

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• Distribution of a typical competing bid

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3.  Miscellaneous considerations

a.  Winner's Curse

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• Size of Winner's Curse depends on uncertainty surrounding value of item and number of bidders

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• Bid must be discounted to take Winner's Curse into consideration

• Behavior of competitors in an English auction should give information about the value of the item

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b.  Expected values

• Assume uniform distribution

(1)  Expected maximum value

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(2)  Expected second highest value

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c.  Revenue differences

(1)  Common-value setting

• Bid discounted relative to actual value to avoid Winner's Curse
  
  
• More uncertainty => greater discount
  
  
• English auction => less uncertainty than sealed-bid => less discount, higher bids

(2)  Bidder risk aversion

• Greater risk aversion leads to lower value placed on item
  
  
• Greater risk aversion => higher bid to increase probability of success, less uncertainty
  
  
• Sealed-bid auction leads to higher bids

(3)  Value asymmetry

• Buyers values have different distributions
  
  
• Sealed-bid auctions result in higher bids

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d.  Reserve prices

• Item withdrawn if minimum bid is not met
  
  
• Risk of not selling item if reserve price not met
  
  
• Forces higher bid than otherwise

4.  Competitive procurement

• Submit bid to supply good or service, lowest bid wins

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• Trade-off between profit and winning the bid
  
  
• Contingent contracts often used

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