Auction theory is an applied branch of economics which deals with how bidders act in auction markets. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. Auction theorists design rules for auctions to address issues which can lead to market failure. The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Paul Milgrom and Robert B. Wilson.
About Auction theory in brief
Auction theory is an applied branch of economics which deals with how bidders act in auction markets. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. Auction theorists design rules for auctions to address issues which can lead to market failure. The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats. ” Theorists consider auctions to be economic games that differ in two respects: format and information. The format defines the rules for the announcement of prices, the placement of bids, the updating of prices and the auction close, and the way a winner is picked. The way auctions differ with respect to information regards the asymmetries of information that exist between bidder. There are traditionally four types of auction that are used for the allocation of a single item: Most auction theory revolves around these four auction types. Some other state-of-the-art auction designs are Product-Mix Auctions which allows ‘package bidding’ which was implemented by Paul Klemperer in response to the 2007 Northern Rock Bank Run to sell troubled debt. The benchmark model for auctions, as defined by McAfee and McMillan, offers a generalization of auction formats, and is based on four assumptions.
Relaxing each of the four main assumptions of the benchmark model yields auction formats with unique characteristics: A game-theoretic auction model is a mathematical game represented by a set of players, a payoff vector corresponding to each player, the players, the seller, the action set of each player and a bid function. Each bid function maps the player’s value to a cost or cost to a price. In a common model, the participants have perfectly accurate valuations of the item, but do not have equal valuations. In the following models, each participant assumes that each participant obtains a private value from a probability distribution from a random distribution of the private value. In this model, each bidder has the incentive to report their valuation honestly. The two are primarily used by sellers to determine the auction type that maximizes the expected price. This optimal auction format is defined such that the item will be offered to the bidder with the highest valuation at a price equal to their valuation, but the seller will refuse to sell the item if they expect that all of the biders’ valuations are less than their own. The state of the art considers how multiple-object auctions can be performed efficiently; Robert B Wilson and Paul Milgrome won The SverIGes Rikson Prize in economic Sciences in memory of AlfredNobel 2020 for their work in defining these auctions.
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