auction

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Are misspelled ads an opportunity to make money on eBay?  Is there a strategy for “Rock, Paper, Scissors”?  Why do lobbyists spend so little money to influence our politics?  Why are online betting sites better at predicting election results than pollsters like Gallup?

All these and other questions were raised by the article on auctions.  The EB‘s article is fairly brief, defining English auctions (with ascending prices) and Dutch auctions (used for tulips, with descending prices), but giving little history.  Wikipedia points out that in 193 A.D. the Praetorian Guard put the entire Roman Empire up for auction in 193 A.D.  (Giving new meaning to the phrase “Winner’s Curse,” the auction winner was later beheaded after a civil war.)

I started wondering about the mathematics and strategies behind auctions.  Is one form of auction (e.g., silent, English, Dutch) always better than another, or do some auction forms suit some products better than others?  What strategies and tactics tend to produce auction wins?  Are there behaviors that harm everyone in an auction?  It turns out that economists have done a lot of work in the game theory of auctions.  Here are some fun facts about auctions, with a bit of game theory thrown in occasionally.

1)  In a form of “auction arbitrage,” some people seek out misspelled ads on eBay (e.g., labtop, saphire, or dimond), knowing that there will be fewer bidders and thus lower prices.  They buy at a low price and immediately resell at the “correct” price (http://bit.ly/1HiGIwY).

2)  Takashi Hashiyama, president of a Japanese electronics firm, couldn’t decide which auction house to use to unload the company’s art collection.  He decided to use “Rock, Paper, Scissors.”  Sotheby’s left it to chance, and Christie’s used scissors to beat their rival’s paper (http://cbsn.ws/1HiF52j).  Mathematicians have suggested that if there is only one round of the game, chance is the best strategy, but if there is more than one round certain reactions to your opponent’s play will give an edge (http://bit.ly/1HiG2HS).

3)  Why do the 35,000 registered lobbyists in D.C. spend only $2 billion every year trying to influence Congress?  If government spending is $10 trillion for every 4-year election cycle, either lobbyists are getting a fabulous bargain when they “buy” our government, or our government is only .1% corrupt.  You decide (http://slate.me/1HiDMAl).

4)  In the last four presidential contests, the Iowa Electronic Market’s market price odds on the eve of election were off by an average of just 1.37 percent — better than Gallup, which had error margins of between 1.5 and 2 percent.  It is thought that such auctions tap into a consensus of the more well-informed (http://bit.ly/1HiHGtb).

5)  If you spend much time on eBay, you’re very familiar with sniping, which is attempting to win an auction with a bid at the last possible moment.  This is a very old tactic.  In some parts of England during the seventeenth and eighteenth centuries auction by candle began to be used for the sale of goods.  The end of the auction was signaled by the expiration of a candle flame, which was intended to ensure that no one could know exactly when the auction would end and make a last-second bid.  One highly successful bidder had observed that, just before expiring, a candle-wick always flares up slightly.  On seeing this, he would shout his final — and winning — bid.  Sometimes, other unpredictable processes, such as a footrace, were used in place of the expiration of a candle. (http://en.wikipedia.org/wiki/Auction)

So, the next time you are watching the television show Storage Wars, and you see Dave Hester trying to bid up a unit and dump it on someone else, ask yourself “What does game theory have to say about this?”

Illustration source: http://bit.ly/1AYmJfN.

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