Game Theory And Auction Theory

The game theory is a powerful tool to understand which is the best strategy in an auction. Depending on the type of auction a different strategy is necessary. For example is a English auction, the best strategy is to bid a "little little" more than the last bidder, because in that way the person can obtain the bigger difference between his reserve price and the final payment. In the case of a Dutch auction the best strategy is to bid exactly the reserve price because in other way the person has the risk that other bidder can bid a big amount and for that to lose the objective of the auction. Of course, this strategy is the best if the bidder don’t know the reserve prices of the other bidders, because in that case, the best strategy is the same that in the English auction. In the case for first-price bid auction and second-price bid auction the best strategy is the same that in the Dutch auction.

One important concept named in the previous paragraph is the reserve price, because of this price depends the strategy. In this sense is important the concept of valuation of the goods, since depending of the valuation you can choose your reserve price. When we talk about values, we can talk about common value or private value. Common value is a situation in which the good has approximately the same value for all the people or bidders in this case (oil field, amount of coins in a jar). While the private value is related with different values for all the bidders. For example, a jacket of Elvis Presley or a guitar of Ringo Star.

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