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Concept
Auction theory
Summary
Auction theory is an applied branch of economics which deals with how bidders act in auction markets and researches how the features of auction markets incentivise predictable outcomes. Auction theory is a tool used to inform the design of real-world auctions. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. The conference of the price between the buyer and seller is an economic equilibrium. Auction theorists design rules for auctions to address issues which can lead to market failure. The design of these rulesets encourages optimal bidding strategies among a variety of informational settings. The 2020 Nobel Prize for Economics was awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.”
Auctions facilitate transactions by enforcing a specific set of rules regarding the resource allocations of a group of bidders. Theorists consider auctions to be economic games that differ in two respects: format and information. The format defines the rules for the announcement of prices, the placement of bids, the updating of prices, the auction close, and the way a winner is picked. The way auctions differ with respect to information regards the asymmetries of information that exist between bidders. In most auctions, bidders have some private information that they choose to withhold from their competitors. For example, bidders usually know their personal valuation of the item, which is unknown to the other bidders and the seller; however, the behaviour of bidders can influence the personal valuation of other bidders.
One of the historical events related to auctions that has been reported is a custom in Babylonia, namely when men try to make an offers to women in order to marry her. The more familiar the auction system is, the more situations where auctions are conducted. There are auctions for various things, from livestock, rare and unusual items, to financial assets.
Non cooperative games have a long history beginning with Cournot's Duopoly model.
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