(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 546
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CHAPTER 13 • Game Theory and Competitive Strategy 521
2. In a common-value auction, you should (a) use an open rather than a sealedbid auction because, as a general rule, an English (open) common-value
auction will generate greater expected revenue than a sealed-bid auction;
and (b) reveal information about the true value of the object being auctioned, thereby reducing concern about the winner’s curse and, consequently, encouraging more bidding.
3. In a private-value auction, set a minimum bid equal to or even somewhat higher than the value to you of keeping the good for future sale.
This will protect against a loss if there are relatively few bidders who
do not value the good very highly. Moreover, it could increase the size
of the bids by signaling to buyers that the object is valuable. Having the
opportunity to try again to sell the good if there is no minimum bid is
obviously an advantage; however, it can be a disadvantage if failure to
sell the good the first time is seen as a signal of low quality to bidders in
future auctions.
Why use an open auction? Recall that in order to avoid the winner’s curse,
each bidder in a common value auction will bid below his individual valuation. The greater the uncertainty about the true value of the object, the greater
the likelihood of an overbid, and therefore the greater the incentive for the
bidder to reduce his bid. (If the bidder is risk-averse, this effect will be magnified.) However, the bidder faces less uncertainty in an English auction than in
a sealed-bid auction because he can observe the prices at which other bidders
drop out of the competition—an advantage that provides information about
their valuations. In short, when you provide more information to bidders, riskaverse bidders will be encouraged to bid more because they will be more confident that they can account for the possibility of a winner’s curse.
Bidding and Collusion
We have seen that sellers at auctions can obtain a significant share of the gains
from trade by encouraging competition among buyers. It follows, therefore,
that buyers can increase their bargaining power by reducing the number of
bidders or the frequency of bidding. In some cases this can be accomplished
legally through the formation of buying groups, but it may also be accomplished illegally through collusive agreements that violate the antitrust
laws. Collusion among buyers is not easy, because even if an “agreement” is
reached, individual buyers will have an incentive to cheat by increasing their
bids at the last minute in order to obtain the desired item. However, repeated
auctions allow for participants to penalize those that break from the agreement by outbidding the “cheater” again and again. Buyer collusion is more of
a problem in open-bid auctions than in the case of sealed bids because open
auctions offer the best opportunity for colluding bidders to detect and punish
cheating.
A well-known case of buyer collusion was the agreement in the mid-1980s
among baseball owners to limit their bidding for free-agent players. The fact
that such bidding was repeated and open made it possible for owners to retaliate against those that bid too often and too aggressively. Collusion, however,
is not limited to buyers. In 2001, two of the world’s most successful auction
houses, Sotheby’s and Christie’s, were found guilty of agreeing to fix the
price of commissions offered to sellers of auctioned items. Former Sotheby’s
chairman Alfred Taubman was sentenced to a year in jail for his involvement
in the scheme.
