00:00:00
So an auction is a method of price
00:00:02
discovery, a method of figuring out what
00:00:04
someone's gonna pay for an item; and
00:00:06
who's gonna get it. So if I've got a
00:00:07
coca-cola to sell and I've got six
00:00:10
people who want it, who's gonna get that
00:00:12
coca-cola and how much are they gonna
00:00:13
pay? And any sort of mechanism in which
00:00:15
the potential buyers express desire in
00:00:19
some way, and then that turns into both a
00:00:22
price and a determination of who gets it;
00:00:24
we call that an auction. The Latin root
00:00:26
of auction came from 'to increase' and
00:00:28
your, kind of, standard auction says we're
00:00:31
gonna let competition push the price up
00:00:34
until one person is left standing. So
00:00:39
probably the most important factor is
00:00:41
price discovery - I don't know what this
00:00:43
item is worth. You have paintings for
00:00:45
sale and no one really knows, you know,
00:00:48
what- the value of those paintings is
00:00:49
pretty much determined by what people
00:00:50
are willing to pay for them. It would be
00:00:54
a- really a frustrating thing if when I
00:00:55
went to buy shampoo in the grocery store
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I had to go bid on it and wait and, well,
00:00:59
let other people bid; all the while
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waiting for my shampoo. And so we
00:01:04
typically wouldn't run auctions when we
00:01:06
have enough of the supply that we're
00:01:08
pretty sure we can sell to everybody and
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we have a good enough sense of the price
00:01:12
or the value that there's no need to run
00:01:15
through a price discovery method.
00:01:16
(Brady: How come we know the price of
shampoo but we)
00:01:18
(don't know the price of the Mona Lisa?)
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In essence th- they can make more shampoo
00:01:24
at roughly the same cost, so that we can
00:01:26
have as much shampoo as we need - if we
00:01:29
need 10% more shampoo that's not a
00:01:31
problem for the shampoo manufacturer. So
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as a result while there could be a
00:01:37
shortage, and you see this often if
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there's a storm coming; people come in
00:01:42
they buy all the stuff off the shelves,
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that would be a time where well
00:01:46
there's gonna be people who go without,
00:01:47
as a result you might think about
00:01:49
holding an auction. Now let me say most
00:01:52
states have laws that prevent sellers
00:01:54
from holding an auction in that
00:01:55
circumstance, they're they're not allowed
00:01:57
to take advantage of people who are in
00:01:59
some sense desperate. You know, otherwise
00:02:01
you know, you can go- if you need ten
00:02:03
bottles of shampoo you go buy 10 bottles
00:02:05
of shampoo, the grocery store doesn't run
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out. Probably the most popular auction is
00:02:09
called an oral ascending auction. You see
00:02:12
it in movies where somebody
00:02:13
tugs their ear and they buy a Ming vase
00:02:15
by accident. The item is put on for sale,
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there's a minimum bid perhaps or a low
00:02:20
bid that the auctioneer starts with, and
00:02:23
then they start with this chatter going
00:02:24
'do I have $10? Do I have $20? I got $20, do I
00:02:27
have $30? Do I have $30?'
and so on and they- the
00:02:30
price rises until at some point there's
00:02:32
only one bidder who's willing to bid at
00:02:35
that price. And that is no one is willing
00:02:37
to go up any more. It's sometimes called the
00:02:39
English auction, it was common in
00:02:41
England but it's actually common around
00:02:43
the world as a method of auctioning. I
00:02:45
believe it was used as far back in time
00:02:47
as the Babylonians. This auction has been
00:02:49
around a really long time. Sealed bid
00:02:52
auction. In this case bidders say 'here is
00:02:55
my bid' - they write it on an envelope,
00:02:57
those envelopes are all opened
00:02:59
simultaneously. The high bidder wins and
00:03:01
they pay their bid. Sometimes that's
00:03:03
called a pay as bid auction; sometimes-
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usually with the word sealed bid, and
00:03:08
sometimes it's called a first price;
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meaning the high bidder paid the high
00:03:12
bid. Typically it's governments that use
00:03:14
sealed bids. Much more common to be
00:03:16
governments, sometimes large corporations
00:03:19
will also use sealed bid. The beauty of a
00:03:21
sealed bid, relative to an English
00:03:23
auction, is that it's hard for the
00:03:26
auctioneer themselves to cheat. So our
00:03:28
big concern with the government holding
00:03:30
an auction is that the government
00:03:32
officials might collude with one of the
00:03:34
bidders. If the government official did
00:03:37
that there would be a paper trail that
00:03:40
allows it to be audited. When I was at
00:03:41
the Department of Justice a bidder
00:03:43
submitted a bid that contained copies of
00:03:47
all their rivals' bids in the same
00:03:49
envelope. And so we were able to show
00:03:51
really easily that the bidders
00:03:53
themselves were colluding with each
other;
00:03:55
price-fixing, it's against the law. The
00:03:57
bidder had inadvertently submitted a
00:03:59
copy of the rivals bids which they
00:04:01
shouldn't have been able to see.
00:04:03
Dutch auction, sometimes called a tulip
00:04:06
auction, is well known for being used in
00:04:08
the Dutch tulip auctions. It's an oral
00:04:10
auction, that is it's used with an
00:04:12
auctioneer and all the bidders assembled
00:04:14
together. And it starts high and then
00:04:17
runs low. If we're selling tulips we'll
00:04:20
say, 'is anybody willing to pay $10,000?'
00:04:23
where we're pretty sure that no one's
00:04:24
willing to pay $10,000, the price is
00:04:26
successively lowered until someone says
00:04:28
I'll take it. And at that moment it sells
00:04:31
to that bidder at the price that they
00:04:33
bid. From a theoretical standpoint this
00:04:36
auction is actually identical to the
00:04:38
sealed bid auction. And if you think
00:04:40
about it, when you submit a bid in a
00:04:42
sealed bid auction you're thinking 'well
00:04:44
the other bidders will bid whatever they
00:04:46
bid and I win if I'm the highest.' Now
00:04:49
imagine yourself in the position of
00:04:51
bidding in the Dutch auction; you're
00:04:53
saying I have to choose a bid and when
00:04:55
the price reaches that bid that's the
00:04:57
moment I'm going to jump in. I'm thinking,
00:04:59
will the other one's bid higher than
00:05:01
that? In which case I'll lose. But if I
00:05:03
put in a higher bid I might win but I
00:05:05
pay more - it's exactly the same thought
00:05:08
process that you face with the sealed
00:05:10
bid auction. So in fact theoretically the
00:05:13
same bidder should win at the same price,
00:05:15
whether I hold a Dutch or a sealed bid.
00:05:18
When we actually run experiments it's
00:05:21
not true, people jump a little bit
00:05:23
earlier in the Dutch auction. That is
00:05:25
they bid a little bit higher - maybe
00:05:27
because of the excitement of it, just the
00:05:29
time while they wait is making them
00:05:31
nervous or something, they're less
00:05:32
rational - we don't know. But they bid a
00:05:35
little bit higher in the Dutch auction
00:05:36
than they do in the sealed bid.
00:05:39
The second price sealed bid auction, or
00:05:42
also known as the Vickrey auction, after
00:05:44
William Vickrey who won the Nobel Prize
00:05:45
for its discovery, along with some other
00:05:47
things about auctions. He did this work
00:05:49
in 1961.
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So the way Vickrey's auction works is it
00:05:52
works just like the sealed bid that we
00:05:53
described before, but now when we open
00:05:57
the envelopes the high bidder will win
00:05:59
but they pay the second highest bid, not
00:06:01
the highest bid. It's the minimum they
00:06:04
could have bid and still won; is
00:06:06
one way to think about it. This is the
00:06:07
price of that. Had they known what all
00:06:09
the other bids were this is what they
00:06:10
would have wanted to bid - is that, maybe
00:06:12
plus a penny to guarantee their win. If
00:06:14
I am paying the second highest price
00:06:16
I'll will- I'll be willing to bid a lot
00:06:19
more aggressively.
00:06:20
If you've bid in eBay this is how eBay
00:06:23
works. You submit a bid, let's say for
00:06:25
$100. When another bid comes in at 40
00:06:28
they then turn around and give it to you
00:06:31
at 40 plus the increment, which might be
00:06:33
45. If that bidder comes back with 60
00:06:36
they'll then give it again to you for 60
00:06:39
plus the increment, there around 65. That
00:06:41
process continues unless someone
00:06:43
actually bids higher than you. So what
00:06:45
that's implemented is a second price
00:06:48
auction, that is to say you don't pay
00:06:50
your bid - you could have been a million
00:06:52
dollars - you still pay the next highest
00:06:55
bid plus a little bit. And the smaller
00:06:59
that little bit is the more it looks
00:07:01
exactly like the Vickrey which is paying
00:07:02
the second highest price.
00:07:05
It's easy to cheat a second-price
00:07:08
auction, because you actually see what
00:07:09
people are willing to pay; so you could
00:07:10
just go to the high bidder and say oh
00:07:12
the second highest bid was just a penny
00:07:15
below your bid, you're gonna have to pay
00:07:17
approximately your bid.
00:07:18
Well they've revealed it, and that can be
00:07:20
dangerous. That's the downside of it; the
00:07:22
upside of it is that it actually gets
00:07:25
this competitive pressure of that oral
00:07:28
auction, which has- you know it's a great
00:07:29
auction for getting- for extracting lots
00:07:31
of money out of people but without
00:07:33
requiring them to be in the same room, or
00:07:35
even to be humans. And a good example of
00:07:37
that: the big search auctions won by
00:07:39
Google and Bing?
00:07:40
They are second price auctions. You bid
00:07:42
but what you pay is just what it would
00:07:45
take to hold your slot. Then let me- let's
00:07:49
let's just think about the first price
00:07:50
sealed bid, or the pay as bid, and the
00:07:52
Vickrey auction. When I'm thinking about
00:07:54
what I should bid to a first price sealed
00:07:56
bid I say, 'well I'm gonna pay my bid.' So
00:08:00
let's say my value is a hundred and I
00:08:02
think about submitting a bid of $75. That
00:08:04
means if I win I get $25. If I lower my
00:08:06
bid a bit - well there's some chance I get
00:08:09
beat but I make more money when I do win.
00:08:11
The seal bid auction causes me to cut my
00:08:14
bid a lot, because that's where my profit
00:08:17
is. On the Vickrey auction in contrast,
00:08:20
then I'm gonna bid $100. Because I want
00:08:23
to win anytime the price comes out below
$100.
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(Brady: And if it comes in lower
that's just gravy?)
00:08:28
It's all extra money for me, it's
00:08:30
all money in my pocket. So there's no
00:08:31
price advantage of lowering your bid,
00:08:34
there's only a 'did I win?'.
00:08:36
Well I only want to win whenever the
00:08:39
price is below my value. Now that's
00:08:41
assuming I know my value. Somebody came
00:08:43
along when I was a graduate student and
00:08:45
offered to sell me a fairly new car for
00:08:48
$50. You know something's wrong with this,
00:08:50
like it's stolen - it's too cheap in some
00:08:53
sense, it's too cheap; I didn't buy
00:08:55
it by the way. Let's tweak the scenario a
00:08:56
little bit, now they come in they offer
00:08:58
you- sell you a car for $2000 that really
00:09:00
should sell for more like four or five
00:09:03
thousand dollars. You're kind of nervous,
00:09:05
there's something that you don't know
00:09:07
about this car - is it really
worth $2,000?
00:09:10
And maybe you need a car and you would
00:09:11
like to buy it but you're still very
00:09:13
suspicious that this car is worthwhile. If
00:09:15
it turns out though that ten other
00:09:18
people who know
00:09:19
cars pretty well had bid 1600, 1800,
00:09:22
1900 dollars - you're gonna be a lot more
00:09:25
willing to pay $2,000. So the effect of
00:09:27
this is, if I know another bidder is
00:09:30
willing to pay more for it rationally I
00:09:33
will actually increase my value, or I
00:09:35
will be less skeptical that it's
00:09:38
actually a pig in a poke. What that means
00:09:41
is the English auction, this oral
00:09:44
ascending auction, does a good job
00:09:46
inducing people to bid more. Why? Because
00:09:49
when the price goes up I say, oh well
00:09:51
there's another bidder - at least one
00:09:52
other bidder - willing to pay this. I then
00:09:54
say, okay good I'm comfortable with that
00:09:55
and I beat them. That causes them to say
00:09:58
oh yes well there's another bidder
00:09:59
willing to pay it and they go up. The
00:10:00
more of that kind of information that's
00:10:02
released the more price pressure there
00:10:05
is and the more we'll push prices up. That
00:10:07
auction does a good job extracting money
00:10:10
out of people because of the release of
00:10:12
information about value from the other
00:10:14
bidders. The effect of this is is that in
00:10:17
a Vickrey auction we get some of those
00:10:19
benefits; not all of them, you know in a
00:10:21
ascending auction I might see that there
00:10:24
were ten other bidders - in the Vickrey
00:10:26
auction all I'm really guaranteed is at
00:10:28
least one other bidder was willing to
00:10:30
pay what I'm gonna be asked to pay for
00:10:31
the item. That tends to drive up values
00:10:34
and hence tends to drive up prices on
00:10:36
average. And that's good for the seller.
00:10:38
It's also good for the buyer in the
00:10:41
following sense; they wind up getting
00:10:42
lower profits but they also lower the
00:10:45
possibility or the likelihood that they
00:10:47
lose money. So we've only talked about
00:10:50
one good item so that is
we're only selling
00:10:52
one item. You know, almost all the
00:10:54
circumstances I deal with we're selling
00:10:56
lots of items so there turns out to be a
00:10:58
version of the Vickrey for that world;
00:11:01
it's got some defects. New Zealand was
00:11:04
an early adopter of the Vickrey auction,
00:11:06
they sold telecom licenses and the
00:11:08
National Cellular license, the high bid
00:11:11
was a hundred and ten million dollars and
00:11:13
the second highest bid, that is the price
00:11:15
in the Vickrey auction, was 11 million.
00:11:17
This is like headline news, government
00:11:20
sells a hundred and ten million dollar
00:11:22
license for 11 million dollars. Sometimes
00:11:25
it's actually a bad idea to find out
00:11:27
what the value is or at least to make it
public.
00:11:29
Had they run that as an ascending
00:11:31
auction this wouldn't have happened.
00:11:32
(Brady: They still would have
missed out on)
00:11:34
(a bunch of money they could have had)
00:11:36
(from the person willing to pay a hundred)
00:11:37
(and ten million. It just wouldn't have)
00:11:39
(been known.)
- Not necessarily. Let's take
00:11:42
the case where they ran a sealed bid
00:11:43
auction, first price - pay your bid. The
00:11:45
bidder who was willing to pay a hundred
00:11:47
and ten million certainly wouldn't have
00:11:49
bid a hundred and ten million, that
00:11:50
would have left them with no profit.
00:11:52
Instead they'd have said, who's the
00:11:54
likely competition here? How much in the
00:11:57
way of resources does that competitor
00:11:59
have? And they'd have come up with a
00:12:01
number; and maybe that number would have
00:12:02
been 12 million in which case they'd have
00:12:04
gotten an extra million - but maybe that
00:12:05
number would have been ten million, in
00:12:07
which case they'd have lost a million.
00:12:08
It's not exactly clear. What's true is
00:12:11
you wouldn't expect it to be a lot more,
00:12:13
and in fact the mathematics of it
00:12:16
suggests you would you would expect less
00:12:18
on average from using that sealed bid
00:12:20
auction than from using the Vickrey
00:12:22
auction - but you wouldn't have kept it
00:12:25
secret. And so you shouldn't think of it
00:12:27
as being, yes I have gotten all that
00:12:28
money had I run a seal bid auction; no
00:12:31
not at all. In fact you might have even
00:12:33
gotten less.
- (Brady: What's your advice to)
00:12:35
(someone who wants to succeed on eBay?)
00:12:38
Most things that sell on eBay there's
00:12:39
more than one copy of it. So that is to
00:12:41
say you- there are multiple copies of it
00:12:44
and so the hard problem on eBay
00:12:46
is not so much what to bid on the item
00:12:49
but which auction to bid in. So my first
00:12:52
advice is, if you want something and
00:12:54
you're not in a hurry if you're in a
00:12:55
hurry well buy it now. If you want
00:12:58
something and you're not in a hurry
00:12:59
watch what the outcomes are, because eBay
00:13:02
doesn't really make this all that easy
00:13:04
to know what what things sell for. Track
00:13:06
how much it sells for in different
00:13:08
auctions and that gives you a, well if
00:13:10
I'm willing to wait six weeks here's
00:13:12
what I expect to pay. If I'm willing to
00:13:14
wait three months I will expect to pay
00:13:16
less, I'll see an auction that shows up
00:13:17
with a lower price. And so that gives you
00:13:20
information that arms you about what to
00:13:22
bid and then sub- figure out that number,
submit it in one
00:13:27
auction - as soon as it gets beat go
00:13:29
submit it in another auction. As soon as
00:13:32
that gets beat, go submit it in a third
00:13:34
auction. And so on. When you do this you
00:13:36
should favor auctions that are about to
00:13:38
expire. Why? Because that way you get the
00:13:40
information earlier about whether you're
00:13:42
going to get beat; so you're kind of
00:13:43
running what we call a search algorithm.
00:13:45
I'm trying to find which
auction is going to
00:13:47
get the item to sell at that low price.
00:13:50
This obviously only applies for items
00:13:52
that are- where there's more than one
00:13:54
item but that is the bulk of the things
00:13:56
that sell on eBay.
00:13:58
That building behind me? That's the
00:14:00
Mathematical Sciences Research Institute,
00:14:03
and that's where today's video was made.
00:14:04
If you'd like to find out more about
00:14:06
them, the mathematics that's done here,
00:14:08
and also the math outreach they support;
00:14:10
you can find out more via some links I've
00:14:12
put in the description under the video.
