Auctions and Bidding: A Primer

Maybe the contractor was right to think bid jobs are different, but it is more likely that he suffered from too simple a view of what is involved in preparing a competitive bid. Our analysis will show that even an experienced estimator working in familiar terrain can lose money if he doesn't understand the subtleties of competitive bidding. The phenomenon experienced by the painting contractor, known as the " Winner's Curse," is just one of the surprising and puzzling conclusions that have been turned up by modern research into auctions. Another is the theoretical proposition (supported also by some experimental evidence) that, for example, a sealed-bid Treasury bill auction in which each buyer pays a price equal to the highest rejected bid would yield more revenue to the Treasury than the current procedure in which the winning bidder pays the seemingly higher amount equal to his own bid. There are also subtle results that demonstrate the equivalence of such apparently different institutions as the standard sealed-bid auction, in which the auctioneer/seller sells the goods to the highest bidder for a price equal to his bid, and the Dutch auction, in which the auctioneer/seller begins by asking a high price and gradually lowers the price until