The Economics of Auctions
The Winner's Curse
In auctions where the value is uncertain, the winner is often the bidder who most overestimated it, so they end up paying too much.
Winning can be losing.
Common value
Oil field rights are worth the same to all, but bidders estimate differently.
Selection
The highest estimate wins, and it is likely to be too high.
Defence
Rational bidders shave their bids to allow for the curse.
Evidence
Winners of oil leases and corporate takeovers often earn less than expected.
An over-eager bidder
A company wins a mine auction after bidding highest and later finds lower reserves.
Assuming winning shows you were smart
It can show you were overoptimistic.
Key takeaways
- Winners often overpay.
- Common-value auctions are prone.
- Bid shading helps.
- Takeovers can show the curse.
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