Instructions for Auctions
We start Lec 1(ii) running a few auctions experiments with real money. I will put the money you are to use in your mail box.
Note: purpose is to have some fun and to get students thinking about this kind of model. Please mention that we will be having an experimental auction next week. Similar setup, except rather than money at stake, extra bonus points on the homework will be at stake.
The class is an international perspectives class and everything has to be about the world beyond the US. So of course this means the auctions will be in a foreign currency. In the large lectures I will use euros, ($1= €.90) but euros are to expensive to use in the small lectures so all of you guys will use yuan ($1 = ¥6.36) as your unit of account.
I actually do not have any yuan currency at the moment. Therefore, please convert the yuan payouts to dollars (rounding up to nearest quarter), and make the payout with the US currency I will give you.
Auction Details
There are three bidders in each auction, except for 1 case.
Let w1, w2, w3, be the cost (wholesale book price) for each bidder. (There is a textbook for sale in the experimental auction, so let’s pretend a book is at stake to tie into that.)
Auction 1
In auction 1, w1=w2=w3=60 and the reservation price is 80. So in principle I can lose 20 if they all bid 80. But more likely to lose between 5 and 15. I will budget 15..
Important: in auction 1 the each bidder has no idea what the costs are of the other bidders. Just explain the game and pick 3 volunteers. (Bidder gets paid difference between bid and wholesale cost)
Main Lessons: Mechanics of how experimental auctions worth (e.g. valuations to players). What are the costs and benefits of low bids?
Auction 2
In auction 2(i) , w1=w2=w3=75. Reservation price is 80. Suppose each knows the others costs. So full information. Bids should come close to 76. (be sure to get people who don't know each other and don't let them talk.) Let's budget 2. Main Lesson: competition works.
In auction 2(ii), w1=75 and there is only one bidder. Presumably they will figure the bid should be 80. This illustrates monopoly. budget 5
Main Lesson: prices are high with monopoly!
In auction 3, there are three bidders, w1=w2=w3=75. But now encourage
the people to talk. Maybe see if you can find some people who know each other. Let's budget 5.
Main Lesson: even with multiple firms we can get something close to
monopoly if firms collude.
So the budget adds up to 15+2+5+5=27. Converting this from yuan to dollars, this costs $4.25. I will give each of you 6 dollars in change (mostly quarters). This should be enough, but if you are a little short I can reimburse you (or you can just change the prize in the last auction so you have enough.)