A game theorist fills a jar with pennies and auctions it off...

Name: Problem 5, Chapter 17: Intermediate Microeconomics: A Modern Approach
Uploaded: 2021-04-08T23:24:07-08:00
Duration: 6 min 18 s
Channel: Tommy Nguyen
Description: A game theorist fills a jar with pennies and auctions it off on the first day of class using an English auction. Is this a private-value or a common-value auction? Do you think the winning bidder usually makes a profit?

A game theorist fills a jar with pennies and auctions it off on the first day of class using an English auction. Is this a private-value or a common-value auction? Do you think the winning bidder usually makes a profit?

Key Concepts

Common-Value Auction

A common-value auction is one in which the true value of the item is identical for all bidders, although each may have different information or estimates about that value. In these auctions, uncertainty about the actual value can lead to overestimation by some bidders, and the highest bidder may end up overpaying, a phenomenon known as the winner’s curse.

Private-Value Auction

A private-value auction is one in which each bidder knows their own individual valuation of the item, and these valuations do not depend on the estimates of the other participants. In such auctions, the value derived by each bidder is unique to them, and bidding strategies generally reflect personal valuations rather than a shared, objective value.

English Auction

An English auction is a dynamic auction format where the price is raised incrementally, and bidders openly call out their bids until no higher bid is offered. This format typically allows bidders to update their perceptions as the auction progresses and can mitigate some aggressive bidding, although in common-value settings, it may still lead to overbidding issues.

Winner's Curse

The winner's curse refers to the tendency of the winning bidder in an auction, particularly in common-value auctions, to overpay relative to the intrinsic value of the item. This occurs when the winner's optimistic estimate overshadows the reality that the item’s true value is common and shared among all bidders. As a result, even if they win the auction, they may not make a profit.

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