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Flexibility Management
 

Flexibility Management

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    Flexibility Management Flexibility Management Presentation Transcript

    • Auction Design I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing Models
    • Outline
      • Choice of Price Format
      • Auction Formats
        • Strategic and Revenue Equivalence
        • A Field Test
      • An In-Class Experiment on Common-Value Auction
    • Choice of Price Format Seller Buyer Seller & Buyer Price Setting Party Price Over Time / Price Formation Static Dynamic www.priceline.com www.landsend.com www.freemarkets.com www.ebay.com www.letsbuyit.com Financial markets www.amazon.com
    • Observations
      • Buyer versus seller:
        • Ample ( limited and unique ) supply  Seller ( buyer ) set prices
        • High ( low ) knowledge of buyer WTPs  Seller ( buyer ) set prices
      • Static versus Dynamic
        • High ( low ) product perishability  Dynamic ( static ) pricing models
        • Price fairness is ( not ) an issue  Static ( dynamic ) pricing models
        • High information asymmetry between buyers and sellers  Dynamic pricing (auction)
        • Higher efficiency  Dynamic pricing
    • Design of Auction Price Setting Party Seller Buyer Seller & Buyer Price Over Time Static Dynamic - Dutch - English - 1 st Price Sealed-bid - 2 nd Price Sealed-bid
    • Promises of Internet Auction
      • Increased convenience (temporal, geographical)
      • Asynchronous bidding is possible
      • Larger markets for the seller
      • Increased ability to search (for the buyer)
      • Removes the need to choose a price for a product
    • Design of Auction: Auction Formats
      • Dutch auction (D) (e.g, www.landsend.com ; http://www.vbn.nl/en/overvbn/index.asp )
      • First-price sealed-bid auction (F) (e.g., US Treasury bills, supply contracts; government procurement (10% GDP))
      • Second-price sealed-bid (Vickrey) auction (S) (e.g., www.sandafayre.com ; NZ’s communication spectrum rights)
      • English auction (E) (e.g., www.ebay.com ; www.yahoo.com )
    • http://www.vbn.nl/en/overvbn/veilingen/index.asp
    • http://www.landsend.com/cd/ov/otc/IndexPage/0,,4_6_0_,00.html?sid=4442138515955145040
    • http://www.sandafayre.com/html/aboutauc.htm MAKE SURE YOU COVER THE PARAGRAPH ON HOW DO OUR AUCTIONS WORK
    • Two Fundamental Questions
      • Which auction pairs are strategically equivalent?
          • Types A and B are strategically equivalent if an identical bidder would follow the same strategy
      • Which auction pairs are revenue equivalent?
          • Types A and B are revenue equivalent if they yield the same expected revenue
    • William Vickrey                                                         
      • WILLIAM VICKREY
      •                                                        
      • 1996 Nobel Laureate in Economics
        • for fundamental contributions to the economic theory of incentives under asymmetric information.
    • Independent Private-Value Auction
      • Buyers are risk-neutral
      • Buyers WTPs are independent of each other and drawn from a uniform distribution
      • What will be the optimal bidding strategies in the following auction formats:
        • Open English auction?
        • Second-price sealed bid (or the so-called Vickrey auction)?
    • Strategic Equivalence Theorem
      • Buyers’ bidding strategies are identical in open English and second-price sealed-bid auction (except for the winner)
        • Second-price sealed bid auction
          • Optimal bid for all bidders =
        • English auction
          • Optimal bid for all bidders except the winner =
          • Optimal bid for the winner =
        • Revenue =
      • Buyers’ bidding strategies are identical in Dutch and first-price sealed-bid auction
        • Optimal bid for bidder i =
        • Revenue =
    • Expected K th Highest Value
      • Let buyer WTPs (independently drawn from an uniform distribution) are denoted by WTP 1 , WTP 2 , …, WTP n-1 , WTP n
      • Arrange them in an ascending order and denote ranked bids by WTP (1) , WTP (2) , …, WTP (n-1) , WTP (n) . That is, we have WTP (1) < WTP (2) < …< WTP (n-1) < WTP (n)
      • Expected K th Highest Value:
    • Revenue Equivalence Theorem
      • Expected revenue is identical in open English and second-price sealed-bid auctions
        • Expected Revenue =
      • Expected revenue is identical in Dutch and first-price sealed-bid auctions
        • Expected Revenue =
      • Expected revenue is identical in Dutch, English, first-price, and second-price sealed-bid auctions
        • IPV
        • Rational, risk-neutral bidders
    • What Happen When Assumptions Fail? Privately unknown values are those where a bidder is uncertain about his own WTP until the auction is over, although he or she does have some noisy signal of his or her WTP D = F < S < E Affiliated, privately unknown WTPs and risk neutrality D = F < S = E Affiliated privately known WTPs and risk neutrality D = F > S = E IPV & risk aversion D = F = S = E IPV and risk neutrality Revenue Rankings Model
    • Why Does Ebay Choose English Auction?
      • In low-priced items, bidders are likely to be risk neutral
      • In these cases, English auction has the highest expected seller revenue
      • Note that Ebay’s revenue increases with seller revenue
      • Thus, the choice of English auction is consistent with revenue maximization for Ebay
    • A Field Test
      • Are Dutch and First-Price sealed-bid auctions “revenue equivalent?”
        • What might this imply for internet auction design?
      • Are English and Second-Price auctions “revenue equivalent?”
        • What might this imply for internet auction design?
    • Dutch versus First Price Auction $0.25 $0.38 Mean Dutch-First price difference 22 12 First-price higher 5 12 Equal revenue 59 63 Dutch higher 86 87 Number of Observations Dutch - First First - Dutch
    • English versus Second-price Auction $0.85 -$0.09 Mean English-Second price difference 24 38 Second-price higher 9 8 Equal revenue 65 20 English higher 98 66 Number of Observations Second - English English - Second
    • Internet Auction Sites
      • Types of products
        • Products in limited supply
        • Instances where demand is unknown to the seller
      • Types of revenue model
        • 80% appear to be “listing sites,” most others “merchant sites”
      • Types of auction format
        • 85% English auction, 14% first-price sealed bid, 1% Dutch
      • Why second-price sealed auction (Vickrey) is uncommon?
    • Common-Value Auctions
      • So far, we analyze only private-value auctions
      • In many industrial settings, firms engage in the so-called common value auctions (e.g., oil leases, resellers)
      • Ex ante , bidders have different guesses about how much the item is objectively worth
      • Ex post , all bidders have the same ex post valuation for the good
    • In-Class Experiment on Common-Value Auction
      • In-class bidding for a jar of coins
        • Write down your name
        • Provide an estimate for its worth
        • Submit a bid for the item
      • First-price sealed-bid auction: Highest bidder wins and pays what he/she bids
      • A prize of $10 for the person who has the most accurate estimate
      • Name: __________________________
      • Estimate: __________________________
      • Bid: __________________________
      Your Response on Index Card
    • Winner’s Curse
      • Winner’s curse occurs when the winner’s bid is higher than the true value of the object. Winning the bid but lose money!
      • Robust phenomenon; occurs frequently both in experiments and in real life
      • Optimal Bidding Strategy
        • The less information you have compared with that your opponents have, the lower your bid ought to be
        • The more uncertain about the true value, the lower you should bid
        • The more bidders that show up for the auction, the lower you should bid
    • Punchline
      • Strategic and revenue equivalence theorems
      • English is the most prevalent in internet auctions
        • English auction induces truthful revelation of WTPs (i.e., Revelation Principle)
        • English auction gives the highest expected revenue when bidders are risk neutral
      • Beware of winner’s curse in common-value auction!