Question

Briefly describe the difference between the mechanism of an oral or English auction and a Vickery or a second price auction. Is there any difference between the winning bidders in the two auctions, and the winning payments made in the two auctions?

Answer 1

The mechanism of an oral or English auction is an open outcry auction. It is a progressive auction in which, the auctioneer launches appropriate auctions with the help of revealing a recommended opening quote. In this suggested opening bid, there is a provision of the starting cost, and after that approval of higher bids accompany the probable interest in them. As the name recommends, this is an open protest auction; for that reason, it is entirely transparent. All the bidders understand each other at the time of the auction (Harstad & Rothkopf, 2000).

Bidders send all at once sealed quotes to the sellers; the greatest bidder wins the object and pays the worth of the second-highest quote. These auctions are called Vickrey auctions in honor of William Vickrey, who wrote the very first game-theoretic analysis of auctions (consisting of the second-price auction [400]. Vickery won the Nobel Memorial Prize in Economics in 1996 for this body of work.

RELATIONSHIPS BETWEEN DIFFERENT AUCTION FORMATS 253 Ascending-Bid and Second-Price Auctions. Now let's think of an ascending-bid auction, in which bidders slowly leave as the seller progressively raises the rate. The winner of the auction is the last bidder remaining, and she pays the rate at which the second-to-last bidder leaves.1 Suppose that you're a bidder in such an auction; let's think about how long you need to remain in the auction prior to leaving. Does it ever make sense to stay in the auction after the cost reaches your true value? No: by remaining in, you either lose and get absolutely nothing, otherwise, you win and have to pay more than your worth for the item. Second, does it ever make good sense to leave prior to the rate reaches your real value for the product? Once again, no: if you drop out early (before your real value is reached), then you get nothing when by staying in you may win the product at a price below your true value. So this informal argument shows that you ought to remain in an ascending-bid auction approximately the exact minute at which the price reaches your real worth. If we consider each bidder I's "drop-out cost" as her quote bi, this says that people must use their real worths as their bids. Moreover, with this meaning of bids, the rule for identifying the result of an ascending bid auction can be reformulated as follows. The person with the highest bid is the one who remains in the longest, hence winning the product, and she pays the cost at which the second-to-last individual left-- in other words, she pays the quote of this second-to-last person. Hence, the product goes to the greatest bidder at a rate equal to the second-highest bid. This is precisely the guideline used in the sealed-bid second-price auction, with the difference being that the ascending-bid auction includes real-time interaction between the purchasers and seller, while the sealed-bid version takes place purely through sealed quotes that the seller opens and examines. But the close resemblance in guidelines helps to motivate the at first counter-intuitive rates guideline for the second-price auction: it can be considered as a simulation, using sealed bids, of an ascending-bid auction. Furthermore, the reality that bidders want to remain in an ascending-bid auction approximately precisely the point at which their true value is reached supplies the intuition for what will be our main lead to the next area: after creating the sealed-bid second-price auction in regards to game theory, we will find that bidding one's real value is a dominant strategy.