The English-style auction we experienced dealt with a lot of economic concepts we've covered in class. That particular kind of auction often causes people to bid more than what a product is worth. Our example with the dollar illustrated this point well. A few people even overbid by another dollar. Your bid in an English-style auction automatically becomes a sunk cost because you have to pay regardless of whether or not you win. Some participants became too consumed in the idea of winning that they continued to bid to "make up" for the money they had already lost. They made poor economic decisions because they considered the sunk costs. The marginal value of winning was higher than the value of the dollar on the auction block. Each time they bid above the monetary value of the dollar, it altered the value of that dollar at the margin.
The rule of law also played a role in our recitation auction. A price ceiling of $2 was introduced during the final round. This bid limit wasn't present in the first two rounds, which violates the rule of law. Every round didn't have the same regulations. The market suddenly had price restrictions in the last round, which goes against a Laissez-Faire economy. Along with the price constraints was another rule that dictated that auction participants could only bid in increments of five cents to deter bidding up by only one cent at a time. Auction participants no longer had equal fairness in the market. This was a painful situation, as illustrated by Marisa choosing to end the auction by bidding the maximum amount allowed by the price ceiling.
The price ceiling actually incentivized her to bid right up to it immediately she told me. She said that it capped her losses at $1.00 as she would win the dollar being bid for.
ReplyDeleteMake sure you understand the marginal analysis and the sunk costs in the auction. You don't describe it correctly here. Review the notes I sent out and I will send some more out on this as well, this is a common mistake that I am seeing. See if you can try your hand at getting the marginal analysis in the auction right though first. Think about why people might bid MORE than a dollar, after having already entered one bid in the auction (remember the rules of the auction).