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The Undercover Economist book mentions these. They're honest but they're publicly embarrassing for governments in auctions with few bidders, because sometimes t

by koube 3y ago

The Undercover Economist book mentions these. They're honest but they're publicly embarrassing for governments in auctions with few bidders, because sometimes there would only be two bidders, one bidding $100k and one bidding $4, so people were wondering why the winner who was bidding $100k was only paying $4 for a license. [0] The book goes on to describe the UK 3G Telecom license auction[1] and explain how it went much better. In summary it was more like a typical auction but instead of bidders proposing bids, the price went up gradually and the the bidders did something like stay as the price went up or leave when the price went too high for them. [0]: https://blogs.cornell.edu/info2040/2022/10/31/when-an-auction-fails-new-zealand-tv-frequencies-case/ https://blogs.cornell.edu/info2040/2022/10/31/when-an-auctio... [1]: https://www.nuff.ox.ac.uk/economics/papers/2002/w4/biggest29nov.pdf https://www.nuff.ox.ac.uk/economics/papers/2002/w4/biggest29...

crazygringo 3y ago
If these auctions were common, it seems like it would be a ripe opportunity for arbitrage. In a case like this if you thought the market value was $100k, someone with no interest in the license should go ahead and bid something like $60k anyways. If everybody else placed silly bids like $4 "just in case nobody else bids for real", you'll win and resell it and walk away with $40k profit. Of course this assumes there is an actual market for the thing -- that a telecoms company really will take it off your hands for $100k. Although if there really is only one person in the world who wants something and they would pay $100k for it... and literally nobody else has any interest in it at all... then there's a good argument to be made that it really is worth $0. Like a remote island that is utter perfection for one hermit, but of zero interest to anyone else.
- traek 3y ago
  A key property of a Vickrey auction is that it is incentive compatible, i.e. that it isn't possible to achieve a better expected outcome by bidding something other than your true valuation. Your example relies on the telecom company (or any secondary buyer) not bidding in the auction or bidding only $4. A strictly dominant strategy for the telecom company would be to bid $100k in the auction, winning it for $60k (the second-highest price).
- qup 3y ago
  > In a case like this if you thought the market value was $100k, someone with no interest in the license should go ahead and bid something like $60k anyways. If everybody else placed silly bids like $4 "just in case nobody else bids for real", you'll win and resell it and walk away with $40k profit. No, in a case like this, you would risk having to fork over 60k, and you would in reality win nothing. The company that bid 100k gets it for 60k, you spend and receive nothing.
andrewmutz 3y ago
What's the difference in the example of the embarrassing public auction? In that example, doesn't one of the two bidders leave the auction when the price rises over $4? Leading to the same outcome?
- qup 3y ago
  You don't choose to leave in a Vickrey auction, your participation is limited to one bid.
- koube 3y ago
  That's correct, the price at the end is theoretically the same, but the public doesn't know about the high bidder's price in the second option. The second option (or just a regular auction) just saves you some embarrassment, which is nothing in the end, but in the political world embarrassment is not nothing. The other benefit (for the seller) mentioned was that bidders get a social signal that other companies think the license is apparently worth the current price, which could pressure the price upwards. Versus Vickrey Auctions where it's a completely blind bid. If you're curious, if you google "undercover economist vickrey auction uk" you may or may not find a ctrl+f searchable pdf where you can read this section yourself.

by koube 3y ago

crazygringo 3y ago

If these auctions were common, it seems like it would be a ripe opportunity for arbitrage. In a case like this if you thought the market value was $100k, someone with no interest in the license should go ahead and bid something like $60k anyways. If everybody else placed silly bids like $4 "just in case nobody else bids for real", you'll win and resell it and walk away with $40k profit. Of course this assumes there is an actual market for the thing -- that a telecoms company really will take it off your hands for $100k. Although if there really is only one person in the world who wants something and they would pay $100k for it... and literally nobody else has any interest in it at all... then there's a good argument to be made that it really is worth $0. Like a remote island that is utter perfection for one hermit, but of zero interest to anyone else.

traek 3y ago
A key property of a Vickrey auction is that it is incentive compatible, i.e. that it isn't possible to achieve a better expected outcome by bidding something other than your true valuation. Your example relies on the telecom company (or any secondary buyer) not bidding in the auction or bidding only $4. A strictly dominant strategy for the telecom company would be to bid $100k in the auction, winning it for $60k (the second-highest price).
qup 3y ago
> In a case like this if you thought the market value was $100k, someone with no interest in the license should go ahead and bid something like $60k anyways. If everybody else placed silly bids like $4 "just in case nobody else bids for real", you'll win and resell it and walk away with $40k profit. No, in a case like this, you would risk having to fork over 60k, and you would in reality win nothing. The company that bid 100k gets it for 60k, you spend and receive nothing.

andrewmutz 3y ago

What's the difference in the example of the embarrassing public auction? In that example, doesn't one of the two bidders leave the auction when the price rises over $4? Leading to the same outcome?

qup 3y ago
You don't choose to leave in a Vickrey auction, your participation is limited to one bid.
koube 3y ago
That's correct, the price at the end is theoretically the same, but the public doesn't know about the high bidder's price in the second option. The second option (or just a regular auction) just saves you some embarrassment, which is nothing in the end, but in the political world embarrassment is not nothing. The other benefit (for the seller) mentioned was that bidders get a social signal that other companies think the license is apparently worth the current price, which could pressure the price upwards. Versus Vickrey Auctions where it's a completely blind bid. If you're curious, if you google "undercover economist vickrey auction uk" you may or may not find a ctrl+f searchable pdf where you can read this section yourself.