Bidding on the Spectrum Debrief

Bidding on the Spectrum debrief

1. How should you bid in the Vickrey auction? Explain how to formulate an appropriate bidding strategy?

The Vickrey auction is designed so that simply bidding your value is the dominant strategy. What you pay never depends on what you bid. Instead, your bid determines only the circumstances when you win the object or objects. You want to when whenever your value is above the “next best bid”, and this happens when you bid your value.

2. How should you bid in the simultaneous ascending auction? What are the key differences between the auction forms?

After the first object has been sold, you should bid up to your incremental value. If you won the first object, the incremental value includes the synergy. If not, then you should bid only up to your value of the remaining object alone. In bidding initially, you should bid above the value of whichever of the licenses has a lower value in proportion to the synergy.

The key difference is that bidding in this way depends on the strategy of the rival and, more generally, is riskier than in the Vickrey auction.

3. As a seller, which auction form is likely to make more money? As a bidder, which do you prefer?

Depending on how conservative the other bidders are in pricing in the synergy, either auction may make more money. If bidders are conservative in the simultaneous ascending auction (i.e. they only bid up to the value of the lower valued license without the synergy) then the Vickrey will tend to do better. If they’re aggressive (i.e. they bid up to the value of the lower valued license plus the full synergy value) the simultaneous ascending auction will do better.

4. Are there other business applications where auctions play a role?

Of course, eBay’s auction platform is the leading example of a version of the Vickrey auction being used in practice. The Vickrey auction is the dominant auction form in B2C auctions online. It is also increasingly used for B2B as well as B2G (business to government auctions). In B2C, eBay is the prominent example. In B2G, the state of Washington does nearly all of its procurement using a Vickrey auction. There are several problems with Vickrey auctions in practice however. In setting where synergies are important, the problem of even determining the winner and the payments is computational complex. (Technically, it is an NP Complete problem). There is a large and growing literature in operations and computer science suggesting algorithms for a variety of business settings. In procurement, there are political problems with the Vickrey---if the bid of the high bidder is discovered, and if it is significantly higher than that of the second highest bidder, this causes considerable embarrassment. It is mainly for this reason that eBay doesn’t disclose the bid of the high bidder. There are also strategic considerations to the release of information. In procurement contexts, if the bids are made public, then a rival can learn the costs of the other bidders through their bids and can potentially take advantage of this information in future interactions. Finally, there are also equity concerns—a bidder placing a higher bid does not necessarily pay more than a bidder placing a lower bid.