Lecture 24 - Asymmetric information: auctions and the winner's curse

author: Benjamin Polak, Department of Economics, Yale University
recorded by: Yale University
published: Nov. 15, 2010,   recorded: September 2007,   views: 2996
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
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Description

We discuss auctions. We first distinguish two extremes: common values and private values. We hold a common value auction in class and discover the winner's curse, the winner tends to overpay. We discuss why this occurs and how to avoid it: you should bid as if you knew that your bid would win; that is, as if you knew your initial estimate of the common value was the highest. This leads you to bid much below your initial estimate. Then we discuss four forms of auction: first-price sealed-bid, second-price sealed-bid, open ascending, and open descending auctions. We discuss bidding strategies in each auction form for the case when values are private. Finally, we start to discuss which auction forms generate higher revenues for the seller, but a proper analysis of this will have to await the next course.

Reading assignment:

Strategies and Games: Theory And Practice. (Dutta): Chapters 19-21

Strategy: An Introduction to Game Theory. (Watson): Chapters 24, 29

Resources:

Blackboard Notes Lecture 24 [PDF]
Practice Problems on Asymmetric Information [PDF]
Solutions to Practice Problems on Asymmetric Information [PDF]
Practice Final Exam (from 2005) [PDF]
Partial Solutions to Final Exam [PDF]

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