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The Federal Communications Commission (FCC) organizes multiple auctions of airwave licenses each year that generate billions of dollars in revenue. The following is a simplified version of an FCC auction. Consider three bidders bidding for two objects (for example, an object could be a license that covers Manhattan, and a bidder can be Comcast).¹ Let vij be bidder i's valuation for object j, where i € {1,2,3} and j € {1,2}. Bidder i knows its valuation vij but other bidders only know that vij is drawn uniformly from [0, 100]. If bidder i wins object 1 at price p₁ and object 2 at price p2, bidder i's payoff is vi P₁ + V₁2 - P2. If bidder i wins only object j at price p,, his payoff is vij - Pj. If bidder i does not win any object, his payoff is 0. The auction proceeds as follows. The initial prices are zero for both objects. All bidders sit -

The Federal Communications Commission (FCC) organizes multiple auctions of airwave licenses each year that generate billions of dollars in revenue. The following is a simplified version of an FCC auction. Consider three bidders bidding for two objects (for example, an object could be a license that covers Manhattan, and a bidder can be Comcast).¹ Let vij be bidder i's valuation for object j, where i € {1,2,3} and j € {1,2}. Bidder i knows its valuation vij but other bidders only know that vij is drawn uniformly from [0, 100]. If bidder i wins object 1 at price p₁ and object 2 at price p2, bidder i's payoff is vi P₁ + V₁2 - P2. If bidder i wins only object j at price p,, his payoff is vij - Pj. If bidder i does not win any object, his payoff is 0. The auction proceeds as follows. The initial prices are zero for both objects. All bidders sit -

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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FCC Auction The Federal Communications Commission (FCC) organizes multiple auctions of airwave licenses each year that generate billions of dollars in revenue. The following is a simplified version of an FCC auction. Consider three bidders bidding for two objects (for example, an object could be a license that covers Manhattan, and a bidder can be Comcast).' Let vij be bidder i's valuation for object j, where i E {1,2, 3} and j e {1,2}. Bidder i knows its valuation v;; but other bidders only know that vij is drawn uniformly from [0, 100]. If bidder i wins object 1 at price p1 and object 2 at price p2, bidder i's payoff is v;1 If bidder i wins only object j at price p;, his payoff is vij – P;. If bidder i does not win any object, his payoff is 0. The auction proceeds as follows. The initial prices are zero for both objects. All bidders sit in front of their computers and observe the prices for both items in real time. Initially all bidders are invited to enter the bidding race for both items. At any moment in time, each bidder has the option to withdraw from the bidding race for either object or both. If a bidder withdraws from the bidding for one object, he can no longer get back to the bidding for that object, but he can stay in the bidding race for the other object if he hasn't withdrawn from it previously. The price for an object increase continuously over time as long as there are Pi + Vi2 – P2. 'FYI. Early this year, FCC organized its 107th auction, where 57 bidders compete for 5,684 airwave licenses for 5G networks. The total revenue from auction 107 is over 80 billion dollars. FCC's auction designs have been adopted by many other countries in the world, and the auctions rules have been updated from time to time. Microeconomic theorists are involved in both auction designs and actual bidding.
Transcribed Image Text:FCC Auction The Federal Communications Commission (FCC) organizes multiple auctions of airwave licenses each year that generate billions of dollars in revenue. The following is a simplified version of an FCC auction. Consider three bidders bidding for two objects (for example, an object could be a license that covers Manhattan, and a bidder can be Comcast).' Let vij be bidder i's valuation for object j, where i E {1,2, 3} and j e {1,2}. Bidder i knows its valuation v;; but other bidders only know that vij is drawn uniformly from [0, 100]. If bidder i wins object 1 at price p1 and object 2 at price p2, bidder i's payoff is v;1 If bidder i wins only object j at price p;, his payoff is vij – P;. If bidder i does not win any object, his payoff is 0. The auction proceeds as follows. The initial prices are zero for both objects. All bidders sit in front of their computers and observe the prices for both items in real time. Initially all bidders are invited to enter the bidding race for both items. At any moment in time, each bidder has the option to withdraw from the bidding race for either object or both. If a bidder withdraws from the bidding for one object, he can no longer get back to the bidding for that object, but he can stay in the bidding race for the other object if he hasn't withdrawn from it previously. The price for an object increase continuously over time as long as there are Pi + Vi2 – P2. 'FYI. Early this year, FCC organized its 107th auction, where 57 bidders compete for 5,684 airwave licenses for 5G networks. The total revenue from auction 107 is over 80 billion dollars. FCC's auction designs have been adopted by many other countries in the world, and the auctions rules have been updated from time to time. Microeconomic theorists are involved in both auction designs and actual bidding.
two or three bidders in the race for that object. The rate of price increase is 1; that is to say, the price increases to x if x units of time has passed, where x is a real number. The price for an object stops increasing if there is at most one bidder left for the bidding race for the object, and the price will stay at that level for the rest of the game; we say the price is locked in this case. (the price for the other object will continue to increase if more than one bidder stays in the bidding race for that object). The auction ends as soon as both prices stop increasing (i.e., at most one bidder remains in the bidding race for each object). An object is sold to the bidder (if any) who remains in the bidding race for that object at the locked price. 1. What should a bidder do if his valuations for the two objects are 50 and 60, respectively? Explain your answer. 2. An efficient allocation is an auction outcome in which each object is given to the bidder who values the object the most. Does the auction lead to an efficient allocation? Explain your answer. 3. Some people advocated the following modification of the auction rule. A bidder cannot bid for only one object, i.e., if at some point in time he withdraws from the bidding race for one object, he automatically withdraws the race for the other object. Every other aspect of the auction, including how prices increase over time, does not change. (a) What should a bidder do if his valuations for the two objects are 50 and 60, respectively? Explain your answer. (b) Does the auction lead to an efficient allocation? Explain your answer.
Transcribed Image Text:two or three bidders in the race for that object. The rate of price increase is 1; that is to say, the price increases to x if x units of time has passed, where x is a real number. The price for an object stops increasing if there is at most one bidder left for the bidding race for the object, and the price will stay at that level for the rest of the game; we say the price is locked in this case. (the price for the other object will continue to increase if more than one bidder stays in the bidding race for that object). The auction ends as soon as both prices stop increasing (i.e., at most one bidder remains in the bidding race for each object). An object is sold to the bidder (if any) who remains in the bidding race for that object at the locked price. 1. What should a bidder do if his valuations for the two objects are 50 and 60, respectively? Explain your answer. 2. An efficient allocation is an auction outcome in which each object is given to the bidder who values the object the most. Does the auction lead to an efficient allocation? Explain your answer. 3. Some people advocated the following modification of the auction rule. A bidder cannot bid for only one object, i.e., if at some point in time he withdraws from the bidding race for one object, he automatically withdraws the race for the other object. Every other aspect of the auction, including how prices increase over time, does not change. (a) What should a bidder do if his valuations for the two objects are 50 and 60, respectively? Explain your answer. (b) Does the auction lead to an efficient allocation? Explain your answer.
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