The Value of Auctions in the Economy

Difference Between Oral Actions and Second-Price Auctions

There are distinct types of auctions, including oral and second-price auctions. The oral auctions comprise of one person standing in front of a room controlling the bidding process while the bidders affirm the price of the product quickly (Froeb, McCann, Shor, & Ward, 2018). The oral bidding process entails successive, increasing, and continuous bids whereby the bidders attempt to outdo each other. The optimal goal is to have only one remaining bidder who subsequently wins the auction. The winner of the auction is based on the highest value offered for the product, which is set marginally higher than the value of the second-highest bidder. The capacity to have more bidding losers increases the chance to attract a higher winning bid. The amount of the winning bid will higher as the bidders continue to challenge each other towards remaining as the highest bidder (Froeb et al., 2018). As well, the more the bidders, the higher value of the bids as it increases the number of bids made on the product. Therefore, the working of oral auction strives to attract more bidders and looser of the bids to ascertain the highest possible value for the product. However, the final highest value is slightly above the second-highest bidder.

On the other hand, second-price auctions comprise of sealed-bid auctions, unlike the oral auctions that are conducted in an open or public arena. The second-price auctions, also known as, Vickery auction, is conducted in secrecy whereby bidders submit their bids without knowing the value offered by other bidders (Froeb et al., 2018). Just like the oral auction, the second-price auction awards the highest bidder the product, but instead of paying their bid, they are prompted to pay the second-highest bid. This prompts the bids to bid more aggressively but often refrain from offering their actual value. This is fundamental to retain the capacity to generate profit from a product whereby the offered value is based on the second-highest bid.

Unlike the oral auction that requires the physical presence of the bidders, the second-price auctions can be conducted from anywhere. Hence, it requires no need for the bidders to be present at the auction. Also, the second-price auction is conducted in secrecy whereby they are not aware of other bidders. This lowers the chances of collusion among the bidders as compared to the conduct of the oral auctions that creates room for bidders’ interactions and communication. The oral auction can also generate the winner’s curse when irrational behaviour is utilized to win the bid. That is, over-bidding as the bidders compete to retain the highest bidding value. Thus, it culminates in a situation where the “winner of the auction is actually worse off for having won the auction” (Froeb et al., 2018).

Expected Value Information – Impact of More Bidders in an Oral Auction

The presence of more bidders in an oral auction increases the value of the bids culminated in the development of expected value information. That is, the more bidders in an auction, the more the number of losing bids and the higher the value of the product (Herweg & Schmidt, 2017). The bids are likely to attract a higher value as more bidders compete to surpass each other in winning the bid. As the competition lasts, the more value for the product is generated by the bids. This culminates in attaining a higher winning bid based on more bidders and losing bids. Thus, more time is necessary to attract more bidders (Froeb et al., 2018).

How the Number of Bidders in a Common Value Auction Affects the Outcome of the Auction?

The presence of a higher number of bidders is likely to attain a higher value for the product. This is based on the generation of the highest value for the product offered by different bidders. In an oral auction, the more the number of bidders, the more losing bids and attempts are bound to commit. This is bound to successively increase the value of the product leading to the highest value of the winning bid (Herweg & Schmidt, 2017). The lower the number of bidders, the lower the highest value of the bid can be generated. In the second-price auction, the more the number of bidders, the higher the bidding values offered by different individuals in the auction (Froeb et al., 2018). This is likely to develop the highest value for the winning bid in the auction and vis-à-vis effect.

Conditions Necessary for Price Discriminate

The capacity of the firms to price discriminate is based on the illustration of the value bidders are willing to offer for a product. This is based on the second-highest bid from a similar bid. The bidding process attracting firm’s price discrimination is informed by raising the second-highest value of the bid and slightly increasing its value to be the starting point. The products values rely on the bidders revealing the information on the value they offer to a product. The capacity to eliminate collusion is integral to retaining the highest value of the price and price discrimination for the firms (Young, 2019). Consequently, provide the firms with a starting value for all other similar products and bids.

References

Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics: A problem-solving approach (5th ed.) [Vital Source Bookshelf version]. Retrieved from https://online.vitalsource.com/#/books/9781337468015

Herweg, F., & Schmidt, K. M. (2017). Auctions versus negotiations: The effects of inefficient renegotiation. RAND Journal of Economics, 48(3), 647–672. Retrieved from https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124623600&site=ehost-live&scope=site

Young, J. (2019). Collusion. Investopedia. (Last Updated May 11, 2019). Retrieved from https://www.investopedia.com/terms/c/collusion.asp#:~:text=Collusion%20is%20a%20non%2Dcompetitive,gain%20an%20unfair%20market%20advantage

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