Question

Explain how differing auction rules and information structures impact the incentives in auctions and determine the optimal bidding strategies in a variety of auctions with independent or correlated values.

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Short answer

The market consists of both local and global bidders. The global bidder strategy will soon reach a stable solution and approach the result of a symmetric Nash equilibrium.

Step-by-step solution

Auction

An auction is a kind of economic activity that has been brought into many people's everyday lives by the Internet, through sites such as eBay. But auctions also have a long history that spans many different domains. For example, the U.S. government uses auctions to sell Treasury bills, timber, and oil leases option.

Step 2: Optimal bidding strategies in a variety of auctions with independent or correlated values.

In more detail, we first consider a market where a single bidder, called the global bidder, can bid in any number of auctions, whereas the other bidders, called the local bidders, are assumed to bid only in a single auction. For this case, we find the following results:

In a single second-price auction, the bidder's best strategy is to bid for true value, which is usually not the case for global bidders. As we will see,the best strategy is to bid below the true value.

The expected utility is maximized by participating in all auctions that sell the item of interest, even if the global bidder needs only one item and is expected to be disposed of for free.

Finding the best bid for each auction can be a daunting task given all possible combinations. However, the most common bidder rating distribution can significantly reduce this search space. The expected utility of a bidder is relatively high in one auction and is maximized by bidding at equal or lesser levels in all other auctions.

Final Result

As the problem is complex, we combine analysis results with discrete simulations to numerically derive the best bidding strategy. The results show that in a market with only global bidders, the dynamics of the best answer do not converge on a pure strategy.

In fact, it oscillates between the two states. However, if the market consists of both local and global bidders, the global bidder strategy will soon reach a stable solution and approach the result of a symmetric Nash equilibrium.