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A key interest of economists is to understand and design mechanisms for allocating resources among competing agents. To that end, we will study the design of auctions, tournaments, and contests, with applications covering Treasury bills auctions, spectrum auctions, ad auctions, corporate takeovers, internal promotion tournaments, grant schemes, innovation prizes, and even bank resolution policies. We also provide rigorous fundamentals in decision and game theory that are used in auction theory. Last update: Gregor Martin, doc. PhDr., Ph.D. (09.05.2025)
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Students should learn in detail the differences between a private value auction and an auction in common values, and the differences in auction formats (ascending-bid, descending-bid, sealed-bid first price v. second price auctions). Students should be able to construct bidding strategies for various auction formats in various auction environments. Students will learn more broadly about the design of competitive mechanisms. Students will also learn rigorous fundamentals in game theory that constitute the building blocks of auction theory. Last update: Gregor Martin, doc. PhDr., Ph.D. (09.05.2025)
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2 assignments (40%) 1 written final exam (60%) Last update: Gregor Martin, doc. PhDr., Ph.D. (14.02.2025)
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Textbooks Beviá, C., Corchón, L. (2024). Contests: Theory and Applications. Cambridge University Press, Chapters 1-3. (Available online at: knihovna.fsv.cuni.cz) Krishna, V. (2010). Auction Theory. Elsevier, Burlington MA, Chapters 1-3, 6. Mas-Colell, A., Whinston, M. D., Green, J. R. (1995). Microeconomic Theory. New York: Oxford University Press, Chapter 6AB. Tadelis, S. (2013). Game Theory: An Introduction. Princeton University Press, Chapters 1-6, 12. Readings Asker, J., Fershtman, C., Pakes, A. (2024). The impact of artificial intelligence design on pricing. Journal of Economics & Management Strategy, 33(2), 276-304. Aumann, R. J. (2019). A synthesis of behavioural and mainstream economics. Nature Human Behaviour, 3(7), 666-670. Blavatskyy, P., Ortmann, A., & Panchenko, V. (2022). On the experimental robustness of the Allais paradox. American Economic Journal: Microeconomics, 14(1), 143-163. Gorbenko, A., Malenko, A. (2024). Auctions with Endogenous Initiation. Journal of Finance, 79(2), 1353-1403. Gregor, M. (2021). Electives shopping, grading policies, and grading competition. Economica, 88(350), 364-398. Hortaçsu, A., Luco, F., Puller, S. L., Zhu, D. (2019). Does strategic ability affect efficiency? Evidence from electricity markets. American Economic Review, 109(12), 4302-4342. Kastl, J. (2020). Auctions in financial markets. International Journal of Industrial Organization, 70, 102559. Miller, J. B., Sanjurjo, A. (2018). Surprised by the hot hand fallacy? A truth in the law of small numbers. Econometrica, 86(6), 2019-2047. Noel, A., Wu, M. (2024). Treasury auction method and underpricing: Evidence from Iceland. Journal of Financial Research, DOI: 10.1111/jfir.12428. Prendergast, C. (2017). How food banks use markets to feed the poor. Journal of Economic Perspectives, 31(4), 145-162. Last update: Gregor Martin, doc. PhDr., Ph.D. (20.05.2025)
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We will be meeting once a week. The class will be a mixed lecture/tutorial style. The course begins on February 25. (The class on February 18 will not be held.) Last update: Gregor Martin, doc. PhDr., Ph.D. (03.02.2025)
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I. Motivation · trading mechanisms · resale options, Coasian bargaining · (in)efficiency of decentralized trading. Application: Food America (Prendergast, 2017) II. Toolkit a) Single-Person Decision Problems: Rationality · rationality as consistency · violations of rationality · Ellsberg paradox and difficulty in detecting and identifying irrationality Application: Allais Paradox (Blavatskyy et al., 2022) Application: Hot hand fallacy (Miller and Sanjurjo, 2018) Textbook: Tadelis (2013), Chapters 1 and 2; Mas-Collel et al. (1995), Chapters 6AB b) N-Person Decision Problems: Static Games Under Complete Information · basics of non-cooperative game theory · static games with pure strategies under complete information · weak dominance · Nash equilibrium in the first-price and second-price auctions with known discrete values · irrationality in games Application: k-level reasoning in Texas electricity markets (Hortascu et al., 2019) Application: Algorithmic pricing (Asker et al., 2023) Textbook: Tadelis (2015), Chapters 3 and 5 III. Auctions with Independent Private Values a) Second Price Auctions · main auction formats · a symmetric independent private value (IPV) environment · weak dominance in the second-price auction (SPA) in IPV environment · resale option in SPA in IPV environment · auction vs. negotiation in asymmetric IPV environments Application: Google’s Project Bernanke Application: Spectrum auction in New Zealand 1990 Textbook: Krishna (2010), Chapter 2 b) First Price Auctions · static games with pure strategies under incomplete information · type-contingent strategies and Bayesian Nash equilibrium · first-price auctions (FPA) in symmetric IPV environments · manipulation of the FPA through multiple bids Application: Spectrum auction in Australia 1993 Textbook: Krishna (2010), Chapter 2; Tadelis (2013), Chapter 12 c) Revenues · mean and variance of revenues in FPA and SPA in symmetric IPV environments · the optimal reserve price in SPA · Revenue Equivalence Principle · all-pay auction in a symmetric IPV environment Application: Buy-It-Now option on e-Bay Textbook: Krishna (2010), Chapter 3 IV. Auctions: Extra Topics a) Common values · alternative ways to model common and interdependent values · why open ascending (English) auction raises larger revenue than SPA if values are strongly positively interdependent · auction initiation in private and common value auctions Application: Strategic and financial bidders in M&A contests (Gorbenko and Malenko, 2024) Textbook: Krishna (2010), Chapter 6 b) Multi-unit auctions · uniform-price and discriminatory-price multi-unit auctions · the basic principles of the equilibria in the share auction with discriminatory prices · Treasury Bill auctions across the world Application: Treasury Bill auctions in Canada (Kastl, 2020) and Iceland (Noel and Wu, 2024) V. Tournaments and Contests · contests under complete information · imperfectly and perfectly discriminative contest-success functions (Tullock lottery and all-pay auction) · the role of the number of players, the degree of discrimination and asymmetry · static games with mixed strategies under complete information. Application: Campaign contributions caps Application: Trade policy Application: Grading competition (Gregor, 2021) Textbook: Beviá and Corchón (2024), Chapters 1-3; Tadelis (2013), Chapter 6 Last update: Gregor Martin, doc. PhDr., Ph.D. (20.05.2025)
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