Which auction is best?

Article: http://www.beyonddiscovery.org/content/view.page.asp?I=3685

We have all sat through class to understand the first-price and second-price auctions. So, which one is better? Who are some of the people associated with these concepts?

One economist, William Vickrey of Columbia University in New York, used game theory to analyze auctions (primarily, second-price auctions) several years before Harsanyi developed his theory. Vickrey’s brilliant study of auction strategies earned him the Nobel Memorial Prize in Economics in 1996 partly for his work on auction theory. Vickrey studied what economists call “private value” auctions, in which each bidder’s value for the item for sale is independent of the values of the other bidders.

"You might wonder, though, why a seller would ever use a second-price auction. Why should she let the winner pay the second-highest bid when she could make the winner pay the highest bid? Astonishingly, Vickrey proved that in a wide class of situations, the seller can expect the same amount of money regardless of which of the four auctions she uses. In 1981, game theorist Roger Myerson of the University of Chicago extended Vickrey’s result to show that all auctions bring in the same expected revenue, provided they award the item to the bidder who values it most, and provided the bidder who values it least doesn’t pay or receive any money, as would happen if there were a fee or reward simply for entering the auction."

Hence, here's something to take home:
"Vickrey figured out how much bidders should shade their bids by looking for the Nash equilibrium strategy. This best strategy varies depending on the circumstances of the auction—for instance, the more bidders in the auction, the less each bidder should shade his bid, since there is less room between the highest bidder’s value and the second-highest bidder’s value. But Vickrey found that no matter what the number of bidders, the shaded bids mean the seller takes home only as much money as in a second-price auction."

The most interesting result is that under certain circumstances that all auctions generate the same seller revenue as long as the item goes to the bidder who values it the most and there is no fee or reward for entering in the auction. These two caveats to Vickery’s auction theory are what keep research into auctions alive. In non-theoretical auctions, we observe these caveats in action. For example, in Ebay or in auctions for airwave frequencies, the buyers have to pay a fee to participate. The initial fee may extort behavior and may eliminate some of the high-value buyers thus altering seller revenue. Furthermore, the Vickery auction scheme does not consider redistribution in auctions. Perhaps the seller provides a bid matching scheme for some bidders rather than others which would greatly affect seller revenue. All in all, Vickery introduced an auction framework that was molded to form the basis of auctions we see used by many companies such as Ebay and Google. The 1996 Nobel prize winner has definitely contributed to a profitable form of e-commerce as well has added an interesting component to network analysis and game theoretic motives of profit maximization.
Link: http://expertvoices.nsdl.org/cornell-info204/2008/03/30/a-nod-to-william-vickery-and-second-price-auctions/



Bottom line, follow the simplest optimal bidding strategy: Just bid the amount at which you value the object.

This website talks about the benefits and advantages of an English Auction.
http://www.econport.org/econport/request?page=man_auctions_englishauction

The English Auction is a commonly observed auction due to its excitement and openness to the public. An English Auction is traditional in the sense that it represents an optimal pastime auction that starts with a reserve price and lets bidders openly bid for an item. This auction has its benefits and downfalls for buyers. A benefit is that the bidders can openly observe who the bidders are and whether they are seriously in a bidding war. However, at the same time, the price is driven up, which could lead to a price higher than the value of the item. In terms of the best type of auction, the English Auction encompasses a lot of strategy. There are techniques like "bid jumping" and "cutting the bid". For instance, a bidder might bid much higher than the present price to eliminate bidders, or even bid at a smaller increment. The English Auction does work well to sell an item to the person with the highest value, or sometimes just the most money. The seller will fair well in this auction.

Check out the Dutch auction. Unlike the Vickrey and English auctions, it is a descending price auction meaning that the auctioneer calls out prices in decreasing order. Dutch auctions are useful for selling multiple units. This is how it works:
1. The auctioneer starts off by setting a high price for the units
2. The auctioneer progresses by calling out decreasing prices
3. When the first player bids, he gets one unit and the auction continues
4. The auctioneer continues calling out decreasing prices till the remaining units are sold

Apparently, the strategy of the Dutch auction is identical to the English auction, where bidders shade their bid. This makes sense because an eager bidder would not want to stop the auction prematurely by calling out a high bid, so he shades his bid to maximize his payoff.
eBay used to offer the Dutch auction but discontinued it. http://pages.ebay.com/help/buy/buyer-multiple.html