Game Theory Auction

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asked 10 months ago

I was reading an article about economics and game theory and came across the following paragraph:
“I happened to walk into a lecture on game theory, and the lecturer gave an example of a beautiful model called a second-price auction,” she says. “In a second-price auction, all bidders are told: Bid in a sealed envelope the maximum price you are willing to pay, and in fact you will pay the second highest price offered. That way, they have nothing to lose by offering the true value. Let’s say they bid 100 and the second price was 80, then they will only pay 80 and benefit from the difference anyway. If they bid less than the second price, they will lose the product. Therefore, it is better for them to bid the price that the product is really worth to them. Studies show that this is a method that encourages people to tell the truth.”
I think it doesn’t necessarily incentivize people to bid the price that the product is worth to them, because if it’s important to them to buy the product then they won’t want to risk bidding lower than the second place. Maybe two people will bid above their price and they’ll win the auction?
Am I missing something? Can you help me understand?

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מיכי Staff answered 10 months ago

I immediately looked for an article or lecture by my friend Michal Feldman on this topic. I found that’s where I took the quote (she’s the speaker): https://www.globes.co.il/news/article.aspx?did=1001496727 First of all, as far as I know, the ‘second price auction’ thesis has been confirmed in empirical studies, meaning that people are indeed incentivized to tell the truth. Although one can still wonder why. The assumption is that everyone makes their own decisions. That’s why they offer a price based on their own decision and not coordinated with anyone else. When you think about it alone, you make the consideration she describes there: If I offer more than I’m willing to pay, it could hurt me because I might win. If I offer less than someone else is offering, I won’t win. That’s why I offer what’s really worth paying for me. It seems to me that you assume that he wants to win the product at all costs and ignore the fact that he also doesn’t want it at a price that is too expensive.

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אפי replied 10 months ago

Indeed you are right, I assumed that it is important for him to win the product even at an expensive price. Most people will buy at a price that is worth it to them. As empirical research shows.
So far we have referred to the price that people are willing to pay. But what about the ’real’ value of the product (or the value that the seller perceives it to be worth)? The offers may be far from it.

דוד ש. replied 10 months ago

This is indeed proven. This is how the auction on eBay works with great success. Anyone who has participated in auctions on eBay knows that it is quite a psychological trick on the bidder. Inexperienced participants will even bid more than they were willing to pay in the first place because they do not think that others will bid more than they think the product is worth and they want to ensure themselves a victory. Usually, products are sold above the price offered in the ”buy it now” and when the bidding exceeds the price for immediate purchase, the option is canceled. A product that has a very small number of ‘bids’ and there is still an option for immediate purchase – if the price is good, it is recommended to purchase it immediately. This auction method is ingenious.