# A Primer on Auction Design, Management, and Strategy

David J. Salant
Pages: 200
https://www.jstor.org/stable/j.ctt1287hr3

1. Front Matter
(pp. i-iv)
(pp. v-x)
3. Preface
(pp. xi-xiv)
4. 1 Introduction
(pp. 1-16)

This is a Primer on auctions. It is intended, in part, to serve as a guide to auctions for the practitioner. This chapter explains what distinguishes auctions from other market transactions. It provides a brief summary of what is essential or helpful for the practitioner.

Auctions are an increasingly common share of all market transactions. They take a great many forms. Often they greatly improve market liquidity, but they can totally fail to work. Perhaps more than half of all auctions result in some or all of what is being put for auction remaining unsold, and even when this does...

5. 2 Game Theory, Auction Design, and Strategy
(pp. 17-28)

Game theory provides analytical techniques needed to analyze auction design and strategy. This is a relatively nontechnical introduction. The chapter focuses on how to apply game-theoretic techniques to the analysis of bid strategy and auction designs.

Auctions have specific rules; these rules govern participation requirements, the form of bids, winner determinations, and payments. The rules of an auction can almost always be translated into a precise mathematical formulation. Such formulations are what is more formally called a mathematicalgame. A mathematical game is a representation of set of strategic interactions, similar to those that occur in ordinary games, into mathematical...

6. 3 Revenue Equivalence
(pp. 29-40)

This chapter explores the relations of outcomes in different auction types. It shows that a first-price sealed-bid auction is strategically equivalent to a Dutch auction. Also conditions are provided under which an English auction is strategically equivalent to a second-price sealed-bid auction. This chapter then provides an explanation of the derivation of perhaps the single most significant result in auction theory, the revenue equivalence theorem (RET). This result states that the expected revenue and bidder payoffs from two auctions will be the same when the final allocations are the same.

A single auction can include one or multiple objects, and...

7. 4 Optimal and VCG Auctions
(pp. 41-54)

This chapter provides a description of how the optimal bid strategy is calculated for a bidder. This methodology is then applied to characterize an optimal auction design. The chapter concludes with a characterization of all auctions in which bidders would have incentives to accurately report true valuations, that is, Vickrey–Clark–Groves auctions.

“Optimal” in this chapter is used to mean an auction design and configuration that maximizes the expected revenues from a forward auction, or minimizes the expected costs from a reverse auction. It turns out that often many seemingly quite different auctions will achieve the same expected outcome....

8. 5 Imperfect Information and the Winner’s Curse
(pp. 55-66)

This chapter describes auctions in which bidders have imperfect information about the value of the object for which they are bidding. One specific case is that where the object has the same common value for each bidder, but bidders have different ex ante estimates of the value. This chapter also examines auctions in which bidders have affiliated values; that is, bidders’ values are correlated in some way. What this means is that winning provides information, and so bids should be adjusted to allow for this fact.

Competing bidders often have to bid without having perfect certainty over values. A bidder...

9. 6 Sequential Auctions of Substitutes
(pp. 67-84)

This chapter examines sequential auctions of multiple lots of an identical good or service. The question addressed is whether price systematically increases or decreases from one auction to the next. Such systematic price patterns can be an important consideration for bidding strategy and for auction design. First considered is a sequence of auctions with an identical pool of risk-neutral bidders. It is shown that under fairly general conditions the expected price will tend to neither increase or decrease across auctions. It is also shown that when bidder opportunity costs can change from one auction to the next, or when bidders...

10. 7 Sequential Auctions of Complements
(pp. 85-98)

This chapter examines auction design and bidding decisions in sequences of auctions in which the outcome of one auction affects a bidder’s profits from winning a subsequent auction. At times, a winner of an initial contract or concession will have a stronger incentive to extend its contract or renew its concession in a second auction than it would had it lost the initial auction. This chapter also explains how the bidding strategy in one auction can be affected by the effect the outcome of that auction may have on a follow-up auction for a complementary product or contract. In both...

11. 8 Single-Product Auctions
(pp. 99-110)

Many auctions include identical lots of a single product. Rather than auction each lot individually, an auctioneer can ask bidders to submit demand (or supply) curves to express how much each bidder wants at any given price. An alternative way for an auctioneer to elicit such demand (or supply) is in the form of a clock auction, in which the auctioneer names a monotone sequence of prices and asks bidders to indicate how much they want at each price. This chapter describes such auctions, and shows when a demand-function (or supply-function) game is strategically equivalent to a clock auction. It...

12. 9 Simultaneous Auctions
(pp. 111-134)

A novel approach to auctioning multiple objects began when the US Federal Communications Commission (FCC) conducted the first simultaneous ascending multiple-round (SMR) auction in 1994. This approach allowed bidders to link their offers for different objects—they could arbitrage substitutes and limit the risk of winning one of a set of complementary objects in SMR auctions. In other words, the SMR auction was probably the first type of auction that allowed bidders to make simultaneous decisions for a set of objects whose values were related. Prior to this, these decisions had to be made independently, creating all sorts of difficult...

13. 10 Combinatorial Auctions
(pp. 135-156)

This chapter looks at package bidding, or combinatorial, auctions. Bidders in multi-object auctions will at times be bidding for substitutes and/or complements. This gives rise to significant additional complexity for both bidders and the auctioneer. When bidders are considering substitute licenses or packages, they will want to obtain the best package for the best price. This need not happen, and both bidders and the auctioneer can suffer. When there are complements, a bidder seeking a large package may end up facing an exposure problem, that is, it may win part of the desired package and pay more than it is...

14. 11 Final Remarks
(pp. 157-162)

This chapter provides an overview of the main points covered in the preceding chapters. The intent is to provide some guidelines to what aspects of auction theory and experience may be relevant in any particular situation.

This book is intended as a Primer and not an encyclopedic guide or a survey of auction theory and practice. The intent is to provide some guidelines to what aspects of auction theory and experience may be relevant in any such situation. This chapter highlights some of the key issues for the various types of auctions encountered in practice.

Any analysis needs to start...

15. Notes
(pp. 163-172)
16. References
(pp. 173-178)
17. Index
(pp. 179-184)