Lecture 24 - Asymmetric Information: Auctions and the Winner's Curse

We discuss auctions. We first distinguish two extremes: common
values and private values. We hold a common value auction in class
and discover the winner’s curse, the winner tends to overpay. We
discuss why this occurs and how to avoid it: you should bid as if
you knew that your bid would win; that is, as if you knew your
initial estimate of the common value was the highest. This leads
you to bid much below your initial estimate. Then we discuss four
forms of auction: first-price sealed-bid, second-price sealed-bid,
open ascending, and open descending auctions. We discuss bidding
strategies in each auction form for the case when values are
private. Finally, we start to discuss which auction forms generate
higher revenues for the seller, but a proper analysis of this will
have to await the next course.