An antique dealer regularly buys objects at a hometown auctions whose bidders are limited to other dealers. Most of her successful bids turn out to be financially worthwhile because she can sell the antiques for a profit. On occasion, however, she travels to a nearby town where auctions are open to the public. She finds that on the rare occasions that she does bid successfully, she is disappointed – the antique bought at public auction can not be sold at a profit.
Explain the difference in her success between the two sets of circumstances.
Apply the logic of this problem to government contracting – but instead of putting yourself in the position of the antique dealer looking to buy an antique at the lowest possible price, imagine that you are the auction house wanting to receive the highest price possible at auction. BY analogy, the government solicits bids, and instead of maximizing revenue, tries to minimize the amount it pays forms to build a bridge or weapons platform. Which type of auction structure do you prefer if you care about maximizing return (lowest cost) from this auction? What auction structure do you prefer if you have an eye to maximizing participation in future auctions?