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Auctions and Competitive Bidding 669

payment plus two-thirds of any gross advertising revenues in excess of $600 million

(up to a maximum $500 million total payment).

Winning Bids for Televising the Olympics

Summer Games Winter Games

1976 Montreal (ABC) $25 million 1976 Innsbruck (ABC) $10 million

1980 Moscow (NBC) $87 1980 Lake Placid (ABC) $15.5

1984 Los Angeles (ABC) $300 1984 Sarajevo (ABC) $91.5

1988 Seoul (NBC) $300–400 1988 Calgary (ABC) $309

1992 Barcelona (NBC) $401 1992 Albertville (CBS) $243

1996 Atlanta (NBC) $456 1994 Lillehammer (CBS) $295

2000 Sydney (NBC) $705 1998 Nagano (CBS) $375

2004 Athens (NBC) $793 2002 Salt Lake City (NBC) $545

2008 Beijing (NBC) $894 2006 Turin (NBC) $613

2012 London (NBC) $1,181 2010 Vancouver (NBC) $820

For the 1992 winter games, the Olympic Committee specified single sealed bids,

before returning to multiple bidding rounds (adding a minimum required bid of

$360 million) for the 1992 summer games. In 1995, a surprising turn occurred in the

competition for the rights to the games from 2000 to 2008. NBC made early (high)

preemptive offers that the organizers mulled and accepted, thereby short circuiting

the bidding competition altogether. However, in 2003, the committee returned to

rounds of competitive bidding for the 2010 and 2012 games.

The history of the Olympics bidding raises a number of questions. As a network

representative, how should you determine the size of your bid? What difference do

the bidding rules make? How should the organizing committee marshal the bidding

competition to maximize its revenue?

This chapter studies an important application of decision making under uncer-

tainty: the use of auctions and competitive bidding. Indeed, auctions are

among the oldest forms of economic exchange. One of the earliest references

was given by Herodotus, who noted a peculiar auction used by the ancient

Babylonians—as a way of distributing wives. In modern economies, a common

means of selecting a best alternative is to solicit competitive bids. In the simplest

(and also most common) bidding settings, the objective is to get the best price.

This is the case in the networks’ bidding for the Olympic Games television

rights. Here, a single seller faces a number of competing buyers, and “best”

price means highest price.

The two most frequently used methods are the English and sealed-bid auc-

tions. In the familiar English ascending auction, the auctioneer calls for higher

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