Auctions and Bargaining in Economics
These are my notes and thoughts on auctions and bargaining in Economics.
Auctions are increasingly used to sell goods and services. There are four major types of auctions: English, Dutch, first-priced, and second-price auctions. Economic theory predicts that under certain assumptions they yield identical revenues for the seller. Bargaining is another frequent way that goods and services are exchanged. Bargaining power importantly determines the terms of exchange.
An open-outcry auction is an auction in which bids are public.
There are many kinds of auctions. Auctions can usually be split along two features:
- How people place their bids
- How price is determined
A sealed-bid auction is one in which bidders place their bids privately, so that no other bidder knows the bid of a participant.
An English auction is an open-outcry auction in which price increases until there is only one standing bid.
A Dutch auction is an open-outcry auction in which the price decreases until a bidder stops the auction. The bidder who stops the auction wins the item and pays the bid.
A first-price auction is an auction in which bidders privately submit bids at the same time. The highest bidder wins the item and pays an amount equal to the bid.
A second-price auction is an auction in which bidders privately submit bids at the same time. The highest bidder wins the item and pays an amount equal to the second highest bid.
The revenue equivalence theorem states that under certain assumptions, the four auction types are expected to raise the same revenues.
Bargaining power describes the relative power an individual has in negotiations with another individual.
In many cases the interactions of buyers and sellers has a role in determining the price of the item being traded. For this reason, studying auctions and bilateral bargaining expands our understanding of how resources are allocated.
There are four common auctions:English, Dutch, first-price, and second-price auctions. Though these auctions work very differently and optimizing behaviors vary considerably among them, under certain assumptions the outcomes they yield have some remarkable similarities. In particular, with all of these auction formats, the buyer with the higher valuation wins the item being auctioned, and the expected revenue of the seller is the same.
Bargaining power of an individual is critical in determining whether and at what price the trade will take place.
In situations where the coase theorem applies, the distribution of bargaining power will not affect whether the efficient outcome is reached, but it will determine how the gains from this outcome are divided.