Discuss Different Auction Types

Auctions are like many other types of market institutions but the only difference is that resources or goods are allocated on the basis of bids from market participants/bidders. There are two main auction models which both assume that bidders’ valuations are private information. The most common auction model is known as the Independent-Private-Values (IPV) Model. In this particular model, there is one risk-neutral seller and N risk-neutral bidders. Bidders have independent and private subjective valuations of the good. Also, these bidders are symmetric in every way except for their valuations but this is not a problem since their valuations are independent anyway. In the IPV model, each bidder’s valuations are drawn from the same uniform distribution. The other model is the Common-Value model which focuses more on objective values, rather than subjective valuations from bidders, with bidders attempting to estimate this objective value.

A Dutch auction is an open auction where an auctioneer calls an initial high asking price which is lowered until one bidder indicated their willingness to pay the going price, which is the seller’s minimum acceptable price. The good is given to the bidder who pays the last announced price.

A first-price sealed- bid auction (FSA) is a sealed auction where each bidder submits their sealed bid, unaware of other bids. The good goes to the bidder submitting the highest bid at a price equal to that bid.

In a Dutch auction, the bidder has to decide beforehand how high they will bid i.e. the price they are willing to stop at. When making this decision, the bidder will be oblivious to other bidders’ ‘stopping prices’ thus the situation so far strongly resembles a FSA since bidders must decide what bid to submit before the designated deadline and bidders in this auction do not know each other’s bids. Therefore, the bidding strategies of both types of auctions are equivalent. Also, in both types of auctions, the winner is the bidder...