Auctions are popular mechanisms for the exchange of goods and services in the marketplace. Common examples of items offered at auctions include real estate, mineral rights, construction contracts, agricultural products, United States Treasury bills, and government procurement contracts. Auctions are now even more commonplace in our personal lives, where online auction sites have made it possible for individuals to bid for and sell items en masse.
Auctions are particularly useful whenever there is uncertainty about the value of an item to be sold and the seller is willing to accept whatever price the market (i.e., the bidders) establishes for the item. Unfortunately, the competition amongst bidders in auctions often results in a phenomenon termed the “winner’s curse,” an outcome in which the winner prevails by submitting a bid that is not only higher than competing bids, but also higher than the true value of the item. In this article, we discuss how this phenomenon can be modeled via simulation and how the simulation results can be used to develop strategies for hedging bids, creating an optimal balance between the probability of winning and the economic gain from the transaction.
Authors: Samuel L. Seaman PhD, Warren J. Hahn PE PhD
Source: Graziadio Business Report
Subjects: Management, Miscellaneous
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