sealed-bid auction

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pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan


Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, Chuck Templeton: OpenTable, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel,, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

Had he been driving during the day, in traffic, it’s conceivable that someone might have been able to help him.) Vickrey’s classic auction study similarly began with a precise explanation of what was wrong with the standard first-price sealed-bid auction that was standard practice in procurement auctions for everything from highways to school supplies, the same mechanism that was used to sell Matsuzaka’s contract. By the time he was done, he’d unwittingly reinvented the stamp collectors’ auction of choice and laid the foundations for the field of auction design in the process. Vickrey described what he thought was a better way: the second-price sealed-bid auction, which is now known simply as a Vickrey auction. Then he proved mathematically that it just might be the best of all possible auctions that one could devise. He changed the auction industry from one that relied on an ad hoc choice of format to one built on design and optimization—a microcosm of economists’ larger role in society.

Before any team could even start negotiating with Matsuzaka’s agent, the Red Sox would need to pay the Lions to release him from his contract. This was a result of the “posting system” created in the late 1990s, under which a Japanese player hoping to move to the United States would notify his team of his intentions.1 Each interested MLB team had one chance to put in its best offer—a so-called sealed-bid auction. The highest bidder would win the right to negotiate a contract with the player. If the negotiations didn’t lead to an agreement within thirty days, the player would return to his team in Japan, and no money would change hands. If the deal got done, the winning bidder would be on the hook for the posting fee to the Japanese team, in addition to whatever salary the team had agreed to pay the player.

It turned out there was, in the form of a mechanism that had been designed over a hundred years ago by stamp dealers to sell collections via mail-in auctions and that had been independently discovered and analyzed by a brilliant Columbia University economist nearly half a century before Matsuzaka’s ill-fated sale to the Red Sox. Curiously, this different approach to auctions was almost exactly the same as the standard sealed-bid auction, with one small twist. Instead of paying the winning bid, the auction winner pays the price offered by the runner-up. But that one small tweak to the auction rules turns out to make a bidder’s job a lot simpler, so much so that just a dozen or so years ago—as the internet revolution was gathering momentum—some thought that it would revolutionize the very nature of commerce. Auctions markets were hardly new—to say the least.

The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg


Albert Einstein, Arthur Eddington, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, information asymmetry, invisible hand, Kenneth Arrow, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

The most familiar is the common English auction, where bidders offer successively higher prices and drop out until only one remains. There is the Dutch auction, where an auctioneer calls out a very high price and successively lowers it until he receives an offer to buy. There is the first-price sealed bid auction, where each buyer submits a bid in an envelope, all are opened simultaneously, and the high bidder gets the item for the amount of his bid. There is the second-price sealed bid auction, where the high bidder gets the item but pays only the amount of the second-highest bid. There are third-, fourth-, and fifth-price sealed bid auctions. And there are more exotic possibilities. In the Glum Losers auction, the high bidder gets the item for free and everybody else pays the amount of his own bid. The seller can choose among these or any other rules that he manages to dream up.

At this point, economic theory makes its entrance, to announce an astonishing truth. Under certain reasonable assumptions (about which I will soon say more), and as a matter of mathematical fact, all of the auction rules I've mentioned yield the same revenue to the seller on average over many auctions. If I regularly sell merchandise at English auctions, while you sell at Dutch auctions, your brother sells at first-price sealed bid auctions, your sister sells at second-price sealed bid auctions, and your crazy Uncle Fester sells at Glum Losers auctions, and if we all sell merchandise of comparable quality, then in the long run we must all do equally well. This result applies as well to a vast number of other auction rules—in fact, to any rule you can imagine that does not involve some entrance fee to the auction hall or its equivalent. I haven't told you how I know that sellers using vastly different rules all do equally well on average, because the argument is technical and I haven't yet figured out how to translate it into simple English.

The answer is yes if there happen to be two high bidders in the audience and no if Cursed Winners and Glum Losers 177 there happens to be just one. Because bidders are unlikely to reveal their bidding strategies in advance of the auction, the seller can never know for certain on any given night whether an English auction is preferable to, say, a Dutch auction. Even to decide between a first-price and a second-price sealed bid auction can be difficult for the seller. On the one hand, in a first-price auction he collects the high bid, while in a second-price auction he collects only the amount of the second-highest bid. On the other hand, bidders generally submit higher bids in a second-price auction. They submit even higher bids in a third-price auction. Which is best for the seller? Again the answer depends on who shows up to bid, and what the bidders' strategies are.

pages: 282 words: 80,907

Who Gets What — and Why: The New Economics of Matchmaking and Market Design by Alvin E. Roth


Affordable Care Act / Obamacare, Airbnb, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, Build a better mousetrap, centralized clearinghouse, Chuck Templeton: OpenTable, commoditize, computer age, computerized markets, crowdsourcing, deferred acceptance, desegregation, experimental economics, first-price auction, Flash crash, High speed trading, income inequality, Internet of things, invention of agriculture, invisible hand, Jean Tirole, law of one price, Lyft, market clearing, market design, medical residency, obamacare, proxy bid, road to serfdom, school choice, sealed-bid auction, second-price auction, second-price sealed-bid, Silicon Valley, spectrum auction, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, The Wealth of Nations by Adam Smith, two-sided market

Goods ranging from works of art to cattle are often sold in “ascending bid” auctions, in which the auctioneer calls out progressively higher prices, until only one bidder remains, and that bidder pays the last, highest price called by the auctioneer. Sometimes items are sold instead in “sealed bid” auctions: each bidder submits a bid without hearing the other bids, the bids are all opened at the same time, and the highest bidder wins, sometimes paying the amount of his bid and sometimes paying the amount of the second- highest bid. Paying the second-highest bid may sound odd, until you notice that in an ascending bid auction, the winning bidder pays the price at which the second-highest bidder dropped out. So in both an ascending bid auction and a second-price sealed bid auction, the highest bidder gets the object at the price just beyond what the second-highest bidder was willing to pay. Both of those auction formats make it easy to decide how much to bid, if you know how much the object is worth to you.

That’s because if you think of the winning bidder’s profit as what the object is worth to him minus what he has to pay for it (and each losing bidder’s profit as zero), it’s perfectly safe for bidders to bid the object’s full true value to them in a sealed bid auction, or to stay in an ascending bid auction until the auctioneer reaches the full amount they are willing to pay. Win or lose, a bidder can’t make a higher profit by bidding something else. That isn’t obvious at all, but if you think about it carefully, you’ll see why it’s true. Consider the second-price sealed bid auction, in which the high bidder receives the object and pays the second-highest bid, while the other bidders pay nothing and receive nothing. By bidding less than the object’s true value, a bidder sometimes turns a profitable winning bid into a losing one, and by bidding more than the true value, he sometimes turns a losing bid into an unprofitable winning bid at which he pays more than the object was worth to him.

In any case, the oil company might get a signal of how much it should be willing to pay by hearing the bids of the other bidders, which would convey some information about those other companies’ estimates of the amount of oil available. In this environment, an ascending bid auction is different from a sealed bid auction, even a second-price auction, since when the bids are sealed, bidders can’t learn anything from how the other bidders behave. But in an ascending bid auction, when you see other bidders drop out, you know their estimates of the value aren’t as high as yours. That might tell you that your own estimate is unrealistic: if there was as much oil in the ground as your geologists estimated, other companies should have seen it, too. In contrast, a sealed bid auction, in which you can’t see when the other bidders drop out, might make it risky to bid at all, since a company with an unrealistically high estimate of how much recoverable oil is in the ground might suffer the “winner’s curse”—that is, win the auction only because it overestimated the value of winning and paid too much.

pages: 242 words: 60,595

Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, Bruce Patton


cognitive dissonance, collective bargaining, rent control, sealed-bid auction, transaction costs, zero-sum game

In a regular sealed-bid auction each bidder tries to offer slightly more than their best guess of what others will bid, which is often less than 87 the bidder would be willing to pay. But in a stamp auction the rules are that the highest bidder gets the stamps at the price of the second highest bid. Buyers can safely bid exactly as much as they would be willing to pay to get the stamps, because the auctioneer guarantees that they will not have to pay it! No bidder is left wishing that he or she had bid more, and the high bidder is happy to pay less than was offered. The auctioneer is pappy knowing that the difference between the highest and second highest bids is usually smaller than the overall increase in the level of bids under this system versus a regular sealed-bid auction.* There is power in using external standards of legitimacy.

pages: 298 words: 43,745

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen


AltaVista, barriers to entry, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, correlation does not imply causation,, first-price auction, information asymmetry, information retrieval, intangible asset, inventory management, life extension, linear programming, megacity, Nash equilibrium, Network effects, PageRank, place-making, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social web, software as a service, stochastic process, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, Vilfredo Pareto, yield management

In the case of sponsored-search auctions, the crowd’s wisdom appropriates perfect information in the auction. In the earliest form of sponsored search [8], from, the keyphrase auction was standard in that the highest bidder was always the winner. However, most sponsored-search auctions are now nonstandard auctions, where the winner of the auction is not always the bidder with the highest bid. More on that later. Most sponsored-search auctions are also sealed-bid auctions, where the amount of the bids of one participant is not known to the other market participants. This is different from an open auction (e.g., a cattle auction or an auction at Sotheby’s), where everyone participating knows all the bids. The original sponsored-search auction was an open auction (see Chapter 2 overview of sponsored search). So, although there are some similarities to standard auctions, as you can see, there are also some noticeable differences with sponsored-search auctions.

It permits you to bid less and get a better slot for your ad in the results listing. Now that we know how the sponsored-search auction works, let us examine the theoretical underpinning of such auctions. The theoretical basis for the sponsored-search auction is the Generalized Second Priced (GSP) auction. The Vickrey auction is the ideal form of GSP auction, so we start here with a brief discussion of the ideal form. A Vickrey auction A Vickrey auction is a type of sealed-bid auction where bidders submit bids without knowing the bid of the other people in the auction. The highest bidder wins, but the bidder pays the amount of the second-highest bid. Very similar to the Standard English auction that one might see at a livestock sale, where all bids are public and known by all, the Vickrey auction gives bidders an incentive to bid their true value. Naturally, this view of the value can be false, incorrect, or misguided.

In sponsored-search auctions, you can also avoid the winner’s curse by leveraging empirical data from your account or data from similar accounts. However, if the auction is in equilibrium, there is no winner’s curse because the bidders account for this effect in their own bids and adjust accordingly. Therefore, each bid represents the true valuation of the resources by the buyer. The pure Vickrey auction deals with auctions where a single good is being sold (i.e., a second-price sealed-bid auction). When multiple identical resources are for sale, things get more complex, and one can apply the same payment principal (i.e., have all winning bidders pay the amount of the highest nonwinning bid). This is known as a uniform price auction. Unfortunately, this situation does not result in bidders bidding their true valuations in most situations, and the auction does not reach stability. Vickrey-Clarke-Groves (VCG) mechanism A generalization of the Vickrey auction that maintains the incentive to bid truthfully is known as the Vickrey-Clarke-Groves (VCG) mechanism.

pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford


Albert Einstein, barriers to entry, Berlin Wall, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

The auctions were held without making sure that there was any interest from bidders, without minimum prices, and using a theoretical curiosity called a “Vickrey auction,” which led to considerable embarrassment. (The auction was named after its inventor, Nobel laureate William Vickrey, who made major early advances in applying game theory to auctions.) The Vickrey auction is a second-price sealed-bid auction. The “sealed bid” means that each bidder writes down a single bid and seals it in an envelope. When the envelopes are opened, the highest bidder wins. “Second-price” is the curious rule that the winner pays not his bid but that of the second-highest bidder. The elegant reasoning behind this auction is that no bidder ever has an incentive to shave his bid in an effort to make more profit; making a lower bid affects his chance of winning but not the price.

Perhaps it was pride: nobody wanted to be the first to drop out, but once Crescent quit, others who had been waiting for the chance also quit soon after. Game theorists have an alternative explanation: bidders were learning from each others’ bids about what the 3G licenses were likely to be worth. This was one of the advantages of the auction’s transparent design. A commonly used alternative would simply have been to run a “sealed bid” auction where everyone handed • 171 • T H E U N D E R C O V E R E C O N O M I S T in an envelope containing a single bid. But such an auction would have left every bidder guessing in the dark, probably leading to much more conservative bidding and a much less profitable outcome for the government. With an open auction, even when the bidding rose higher than anyone had expected, each bidder could see that its twelve competitors were making equally large offers and shared confidence that the licenses would prove hugely valuable.

pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan


accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

In what form should the bids be accepted? Most auctions use an open auction, as is traditionally used to sell art and antiques, in which the bidders go on topping each others’ bids until only one wants to continue. An alternative way of running the bidding is the Dutch auction, used to sell flowers at Aalsmeer, in which the price starts high and falls until a bidder claims the item. Another is the sealed-bid auction, in which there is a single round of sealed bids; the high bidder wins and pays his or her bid. Commercial real estate is sometimes sold this way. A variant is the second-price auction, in which there is a single round of bidding and the high bidder wins, but unlike first-price auctions, the price paid is the second-highest bid. Second-price auctions are used for selling stamps. eBay chose open auctions.

An auction site is more valuable to a seller if it already attracts more buyers. In turn, buyers go where the sellers already are, which makes the site still more attractive to sellers. Since eBay was there first, the network externality helps make its success self-perpetuating. Myriad auction mechanisms can be found on the various online auction sites. Dutch auctions are used to sell containers on oceangoing cargo vessels. Sealed-bid auctions are used for selling vacation time-shares. A few sites allow package bidding. One wine auction site, for example, packages bottles into sets (usually different vintages from a particular vineyard). It then accepts not only bids on the individual bottles but also all-or-nothing bids on the package. If a bid for the package exceeds the total of the high bids for the individual bottles, the package bidder wins.

pages: 523 words: 143,139

Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian, Tom Griffiths


4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, algorithmic trading, anthropic principle, asset allocation, autonomous vehicles, Bayesian statistics, Berlin Wall, Bill Duvall, bitcoin, Community Supported Agriculture, complexity theory, constrained optimization, cosmological principle, cryptocurrency, Danny Hillis, David Heinemeier Hansson, delayed gratification, dematerialisation, diversification, Donald Knuth, double helix, Elon Musk, fault tolerance, Fellow of the Royal Society, Firefox, first-price auction, Flash crash, Frederick Winslow Taylor, George Akerlof, global supply chain, Google Chrome, Henri Poincaré, information retrieval, Internet Archive, Jeff Bezos, John Nash: game theory, John von Neumann, knapsack problem, Lao Tzu, Leonard Kleinrock, linear programming, martingale, Nash equilibrium, natural language processing, NP-complete, P = NP, packet switching, Pierre-Simon Laplace, prediction markets, race to the bottom, RAND corporation, RFC: Request For Comment, Robert X Cringely, sealed-bid auction, second-price auction, self-driving car, Silicon Valley, Skype, sorting algorithm, spectrum auction, Steve Jobs, stochastic process, Thomas Bayes, Thomas Malthus, traveling salesman, Turing machine, urban planning, Vickrey auction, Vilfredo Pareto, Walter Mischel, Y Combinator, zero-sum game

In an English auction, bidders alternate raising the price until all but one of them drop out. This seems to offer something closer to what we want: here, if you value an item at $25 and I value it at $10, you’ll win it for just over $10 without either having to go all the way to $25 or disappearing down the strategic rabbit hole. Both the Dutch auction and English auction introduce an extra level of complexity when compared to a sealed-bid auction, however. They involve not only the private information that each bidder has but also the public flow of bidding behavior. (In a Dutch auction, it is the absence of a bid that reveals information, by making it clear that none of the other bidders value the item at the current price level.) And under the right circumstances, this mixing of private and public data can prove toxic. Imagine the bidders are doubtful about their own estimations of the value of an auction lot—say, the right to drill for oil in some part of the ocean.

We’ve seen how seemingly innocuous auction mechanisms, for instance, can run into all sorts of problems: overthinking, overpaying, runaway cascades. But the situation is not completely hopeless. In fact, there’s one auction design in particular that cuts through the burden of mental recursion like a hot knife through butter. It’s called the Vickrey auction. Named for Nobel Prize–winning economist William Vickrey, the Vickrey auction, just like the first-price auction, is a “sealed bid” auction process. That is, every participant simply writes down a single number in secret, and the highest bidder wins. However, in a Vickrey auction, the winner ends up paying not the amount of their own bid, but that of the second-place bidder. That is to say, if you bid $25 and I bid $10, you win the item at my price: you only have to pay $10. To a game theorist, a Vickrey auction has a number of attractive properties.

pages: 184 words: 62,220

Slouching Towards Bethlehem by Joan Didion

Donner party, East Village, Golden Gate Park, Haight Ashbury, Khartoum Gordon, Mahatma Gandhi, Marshall McLuhan, Maui Hawaii, profit motive, sealed-bid auction

Every morning the KGO traffic reporter drops the San Francisco Chronicle from his helicopter, and when he has time he stops for coffee. No one else comes out there except a man from the General Services Administration named Thomas Scott, who brings out an occasional congressman or somebody who wants to buy the island or, once in a while, his wife and small son, for a picnic. Quite a few people would like to buy the island, and Mr. Scott reckons that it would bring about five million dollars in a sealed-bid auction, but the General Services Administration is powerless to sell it until Congress acts on a standing proposal to turn the island into a “peace park.” Mr. Scott says that he will be glad to get Alcatraz off his hands, but the charge of a fortress island could not be something a man gives up without ambivalent thoughts. I went out there with him a while ago. Any child could imagine a prison more like a prison than Alcatraz looks, for what bars and wires there are seem perfunctory, beside the point; the island itself was the prison, and the cold tide its wall.

pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski


Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Unfortunately, the market designers responded to the Treasury’s call for assistance by submitting widely incompatible designs for the auctions, necessitating the Treasury to decide between the rival analyses. By itself, the presence of rival proposals was not an insuperable obstacle, but complicating matters was that from the perspective of the Treasury one could not tell on paper what the best auction form was.132 For example, one dispute broke out over whether to run an “open” or “sealed bid” auction. This had historically been one of the most basic issues that market designers grapple with, and, yet, one proposal called for an “open” auction, yet another for a “closed” auction. Which one was to be preferred was supposed to turn on which mechanism did the best job of aggregating information, but theory provided neither guidance about which form was better, nor guidance about whether either form would bring new bits of useful information into the market.

The dynamic auction, by revealing market supply as the price declines, lets the bidders condition their bids on the aggregate market information. As a result, common-value uncertainty is reduced and bidders will be comfortable bidding more aggressively without falling prey to the winner’s curse—the tendency in a procurement setting of naïve sellers to sell at prices below true value . . . A principal benefit of the clock auction is the inherent price-discovery feedback mechanism that is absent in any sealed-bid auction format. Specifically, as the auction progresses, participants learn how the aggregate demand changes with price, which allows bidders to update their own strategies and avoid the winner’s curse . . . Efficiency in the clock auction always exceeded 97%.138 This passage corresponds to the point made above, that market designers viewed the toxic assets as “common” or objectively valued, and that such cases posed for the market designer the task of figuring out how to aggregate information.

The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank


carbon footprint, carried interest, Cass Sunstein, clean water, congestion charging, corporate governance, deliberate practice, full employment, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Paul Samuelson, Plutocrats, plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, trickle-down economics, ultimatum game, winner-take-all economy

“Exploring the Role of Pricing as a Congestion Management Tool,” Searching for Solutions: A Policy Discussion Series, No. 1, Federal Highway Administration and Federal Transit Administration, Washington, D.C., July 23, 1991. 5. See, for example, Michael O’Hare, Lawrence Bacow, and Debra Sanderson, Facility Siting and Public Opposition, New York: Van Nostrand Reinhold, 1983; and Howard Kunreuther and Paul Kleindorfer, “A Sealed-Bid Auction Mechanism for Siting Noxious Facilities,” American Economic Review 76(2), May 1986: 295–299. Chapter Eight: “It’s Your Money . . .” 1. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 2. Liam Murphy and Thomas Nagel, “Tax Travesties,” Boston Globe, January 26, 2003, .html. 3.

pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey; John E. Morris; John Morris


activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bonfire of the Vanities, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, diversification, diversified portfolio, fixed income, Gordon Gekko, margin call, Menlo Park, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, sealed-bid auction, Silicon Valley, sovereign wealth fund, The Predators' Ball, éminence grise

Zeroing in on the fact that Morris had a major bank backing its bid, he reckoned Morris could be induced to pay more. Rather than reveal the bids, he kept the amounts under wraps and proceeded to arrange a second round of sealed bids. He hoped to convince Morris that Cox and Gannett were hot on its heels. The stratagem worked, as Morris hiked its offer by $15 million. “That was $15 million Steve got for CSX that nobody else, including CSX, had the guts to do,” says Schlosstein. Today sealed-bid auctions for companies are the norm, but then they were exceedingly rare. “We made it up as we went along,” says Schwarzman, who credits himself with pioneering the idea. As the economy emerged from a grueling recession in the early 1980s, Lehman’s banking business took off and its traders racked up bigger and bigger profits playing the markets. But instead of fostering peace at the firm, Lehman’s prosperity brought the long-simmering friction between its bankers and traders to a boil as the traders felt they were shortchanged by the bank’s compensation system.