9781118041581

Summary 705

Suggested References

The following articles discuss real-world auction applications.

Bajari, P., and A. Hortacsu. “Economic Insights from Internet Auctions.” Journal of Economic Liter-

ature42 (2004): 457–486.

Klemperer, P. “What Really Matters in Auction Design.” Journal of Economic Perspectives(Winter

2002): 169–189.

The following readings review the rich body of experimental evidence on bidder behavior and auction perform-

ance.

Kagel, J. H. “Auctions: A Survey of Experimental Research.” In J. H. Kagel and A. E. Roth (Eds.),

The Handbook of Experimental Economics. Princeton, NJ: Princeton University Press, 1995.

Samuelson, W. “Auctions in Theory and Practice.” In K. Chatterjee and W. Samuelson (Eds.), Game

Theory and Business Applications, Chapter 10. Boston: Kluwer Academic Publishers, 2001.

Thaler, R. H. “The Winner’s Curse.” Journal of Economic Perspectives(Winter 1988): 191–202.

The next group of readings uses game theory and other advanced methods to characterize the equilibrium out-

comes of auctions. (These articles presume a high degree of mathematical sophistication.)

Klemperer, P. Auctions: Theory and Practice, Princeton, NJ: Princeton University Press, 2004.

McAfee, R. P., and J. McMillan. “Auctions and Bidding.” Journal of Economic Literature(1987):

699–738.

Milgrom, P. Putting Auction Theory to Work.Oxford: Oxford University Press, 2004.

Milgrom, P., and R. Weber. “The Theory of Auctions.” Econometrica(1982): 1089–1122.

Riley, J. G., and W. Samuelson. “Optimal Auctions.” American Economic Review(1981): 381–392.

“Symposium on Auctions.” Journal of Economic Perspectives(Summer 1989): 3–50.

Vickrey, W. “Counterspeculation, Auctions, and Competitive Sealed Tenders.” Journal of Finance

(1961): 8–37.

Auction sites on the Internet include:

http://www.ebay.com,

http://www.paulklemperer.org/index.htm (auction resources gathered by Professor Paul Klemperer)

http://www.webcom.com/agorics/auctions/auction1.html (a valuable discussion of all kinds of auctions)

CHECK STATION

ANSWERS

1. Selecting the better of two offers is always advantageous relative to
   precommitting to one offer or the other. There is a .5 chance that firm B
   will beat firm A’s $24 price. Firm B’s expected price, conditional on it
   being greater than $24, is (24 28)/2 $26. Thus, firm S’s overall
   average price is (.5)(24) (.5)(26) $25.


2. Against one bidder, $20,000 is optimal; the expected profit is (.6)(10,000) 
   $6,000. Against two bidders, $24,000 is optimal; the expected profit is
   (.8)^2 (6,000) $3,840. Against three bidders, $24,000 is still optimal; the
   expected profit is (.8)^3 (6,000) $3,072.


3. (i) Given b 2 .6v 2 , firm 2’s bids are uniformly distributed between 0 and


4. Thus, buyer 1’s expected profit is: E() (v 1 b)(b/30). Setting
   dE()/db 0 implies (v 1 2b)/30 0, or b 1 .5v 1. ii) For b 2 .4v2,we
   have E() (v 1 b)(b/20) and dE()/db (v 1 2b)/20. Again, firm
   2 should bid b 1 .5v 1 for v 1 40. For all v 1 > 40, the firm should bid 20,

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