Full Answer Section

Oral auctions can be very competitive, and the winning bid price is often higher than the seller’s initial asking price. This is because bidders in oral auctions are able to see how much other bidders are willing to pay, and they can adjust their bids accordingly.

Second-Price Auctions

Second-price auctions are a type of auction in which the winning bidder pays the second-highest bid price, rather than their own bid price. This type of auction is less common than oral auctions, but it is sometimes used in specialized markets, such as advertising auctions.

Second-price auctions work as follows:

1. Bidders submit their bids in writing to the auctioneer.
2. The auctioneer then announces the winning bidder and the winning bid price.
3. The winning bidder pays the auctioneer the second-highest bid price.

Second-price auctions can be beneficial for sellers because they can encourage bidders to submit their true valuations of the item being auctioned. This is because bidders know that they will not win the auction unless they submit a bid that is higher than the true value of the item to them.

Expected Value and Oral Auctions

The expected value of an auction is the average of the possible outcomes of the auction. In an oral auction, the expected value of a bid is the probability of winning the auction multiplied by the winning bid price.

The more bidders there are in an oral auction, the higher the expected value of a bid is likely to be. This is because the more bidders there are, the more likely it is that the winning bid price will be close to the true value of the item to the winning bidder.

Common Value Auctions and the Number of Bidders

A common value auction is a type of auction in which the value of the item being auctioned is the same to all bidders. In a common value auction, the number of bidders can have a significant impact on the outcome of the auction.

If there are only two bidders in a common value auction, then the winning bid price is likely to be close to the true value of the item to both bidders. However, if there are many bidders in a common value auction, then the winning bid price is likely to be higher than the true value of the item to the winning bidder. This is because bidders in common value auctions tend to overbid in an attempt to win the auction.

The effect of the number of bidders on the outcome of a common value auction is similar to the effect of the number of producers on the price in different market structures. In a perfectly competitive market, there are many producers and the price of the good is equal to the marginal cost of production. In a monopoly, there is only one producer and the price of the good is set by the monopolist. In a common value auction with many bidders, the winning bid price is likely to be higher than the true value of the item to the winning bidder. This is similar to how the price of a good in a monopoly is set above the marginal cost of production.

Price Discrimination

Price discrimination is the practice of charging different prices to different consumers for the same good or service. Firms often rely on buyers revealing their value for products in order to successfully price discriminate.

One way that firms can get buyers to reveal their value for products is through auctions. In an auction, buyers are forced to reveal their value for the product in order to win the auction.

For firms to be able to price discriminate, they must meet the following conditions:

1. The firm must have some degree of market power. This means that the firm must be able to influence the price of the good or service.
2. The firm must be able to identify different groups of consumers with different valuations for the good or service.
3. The firm must be able to prevent consumers from reselling the good or service to other consumers.

Auctions can be a useful tool for firms that are trying to price discriminate. By forcing buyers to reveal their value for the product, auctions can help firms to identify different groups of consumers with different valuations. This information can then be used to set different prices for different groups of consumers.