Supply and Demand in Auctions.docx

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ECON 1101
Ethan Singer

Auctions • An important form of market exchange that matches suppliers with consumers ◦ Treasury bills: auctioned/sold when the government spends more money than they have in tax money ◦ Cell phone spectra: FCC auctions to right to use the cellular airways • Single vs Double-sided auctions ◦ Single-sided: either the supplier or the consumer are bidding, but not both ▪ traditional auctions (eBay, etc), only the consumer is bidding ▪ bids for construction companies, only the supplier is bidding ◦ Double-sided: both the supplier and the consumer are bidding ▪ electricity auctions ▪ stock trading • Sealed-bid vs open outcry ◦ Sealed-bid: price is written, other bidders don't see it ◦ Open outcry: price is known to all parties Experiment 1: single-sided, sellers submit bids, sealed bid, pay as bid • A buyer needs a book ◦ There are three sellers, i=1,2,3 ◦ The buyer has a reserve price (won't pay any more than this) ◦ w(i) is the price that seller i got the book for (wholesale cost) ◦ the seller i submits price p(i) (sealed bid) ◦ sale goes to the lowest bidder at this bid (if below reserve price) ◦ If bidder i gets sale, has profit of (p(i) - w(i)) • Auction outcome: ◦ Buyer reservation price of 80 ◦ Seller costs: ▪ w1 = 60 w2 = 60 w3 = 60 ◦ Bids: ▪ 1 = 65 2 = 35 3 = 65 ◦ Winner: bidder 2 ▪ Profit(2) = -25 Experiment 2: adding some competition, bidders know each others' costs Three bidders: • Costs: w1 = w2 = w3 = 60 • Buyer reserve price: 80 • Bids ◦ 1 = 64 2 = 75 3 = 63.5 • Winner: bidder 3 One bidder: • Costs: 60 • Buyer reserve price: 80 • Bid: 80 • Sale Price: 80 Experiment 3: adding collusion, cartel set-up • Costs: 75 • Buyer reserve price: 80 • Bidders can communicate • All bid 80 • Random winner • can create agreement to split profits among bidders Low bids: • Costs: low profit • Benefits: higher chance of sale, more opportunity to make a profit Competition: • if bidders know each other's cost, and have the same cost, the sale price will be lower • if there is only one bidder, a monopoly is creating, and the price is high Collusion: • increases price • can get monopoly price with multiple firms if they act as a monopoly • collusion to fix prices is illegal in the US and in many other countries Electricity Auction in the UK • "Independent System Operator" ◦ Receives offers to sell from Suppliers ▪ "I will sell 10 megawatt hours for 25 pounds from 11:00-11:30
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