Auction theory
Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost.
The design of these rulesets encourages optimal bidding strategies in a variety of informational settings.
"[2] Auctions facilitate transactions by enforcing a specific set of rules regarding the resource allocations of a group of bidders.
Theorists consider auctions to be economic games that have two aspects: format and information.
A purportedly historical event related to auctions is a custom in Babylonia, namely when men make an offers to women in order to marry them.
In 1979 Riley & Samuelson (1981) proved a general revenue equivalence theorem that applies to all buyers and hence to the seller.
The equivalence theorem shows that any allocation mechanism or auction that satisfies the four main assumptions of the benchmark model will lead to the same expected revenue for the seller.
In a recent working paper on general asymmetric auctions, Riley (2022) characterized equilibrium bids for all valuation distributions.
Quite independently and soon after, Myerson (1981) used the revelation principle to characterize revenue-maximizing sealed high-bid auctions.
Relaxing each of the four main assumptions of the benchmark model yields auction formats with unique characteristics.
[18] The theory of efficient trading processes developed in a static framework relies heavily on the premise of non-repetition.
If buyer 1 follows suit she halves her profit margin and less than doubles her win probability (because of the tie breaking rule, a coin toss).
[23] Later published research includes Susan Athey's 2001 Econometrica article,[24] as well as that by Reny and Zamir (2004).
(Quite independently and soon after, this was also derived by Myerson (1981)).The revenue equivalence theorem states that any allocation mechanism, or auction that satisfies the four main assumptions of the benchmark model, will lead to the same expected revenue for the seller (and player i of type v can expect the same surplus across auction types).
[18] The basic version of the theorem asserts that, as long as the Symmetric Independent Private Value (SIPV) environment assumption holds, all standard auctions give the same expected profit to the auctioneer and the same expected surplus to the bidder.
[18] In an equilibrium of such a game, the winner's curse does not occur because the bidders account for the bias in their bidding strategies.
Behaviorally and empirically, however, winner's curse is a common phenomenon, described in detail by Richard Thaler.
With identically and independently distributed private valuations, Riley and Samuelson (1981)[27] showed that in any auction or auction-like action (such as the "War of Attrition") the allocation is "participant efficient", i.e. the item is allocated to the buyer submitting the highest bid, with a probability of 1.
They then showed that discriminating against low-value buyers by setting a minimum, or reserve, price would increase expected revenue.
[28] Also examined is the question of whether it might ever be more profitable to design a mechanism that awards the item to a bidder other than one with the highest value.
As Maskin and Riley then showed, this is equivalent to excluding bids over certain intervals above the optimal reserve price.
[30] Scholars of managerial economics have noted some applications of auction theory in business strategy.
The value generated from waiting for the technology to become commercially viable also increases the risk that a competitor will enter the market preemptively.
The company with better information would then "bid" to enter the market earlier, even as the risk of failure is higher.
This forces established airlines to also decrease prices to avoid losing market share.
SMRAs are deemed to solve a problem facing the Federal Communications Commission (FCC).
If the FCC were to sell all of its telecommunication frequency slots by using a traditional auction method, it would eventually either give away licenses for free or end up with a telecom monopoly in the United States.
All the bidders can adjust and change their auction price and strategy after they listen to the highest bid in a particular round.
SMRA's first distinguishing feature is that the auction is taking place simultaneously for different items; therefore, it seriously increases the cost for speculators.
The second difference is that the bidding takes place in numerous rounds and the highest price of bidding is announced each round, allowing bidders to learn more about their competitors' preferences and information and to adjust their strategy accordingly, thus decreasing the effect of asymmetric information inside the auction.
