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Politehnica University of Bucharest

Faculty of Engineering in Foreign Languages

Event Driven Dynamic Systems

Auctions

Bucharest, 2014-2015

Table of Contents
Introduction................................................................................................................ 4
Auction....................................................................................................................... 5

Introduction
Auctions are a public sale in which goods or property is sold to the
highest bidder. However, depending on the type of auction all bidders will
pay even if only one wins or the starting price is extremely high decreasing
with time.
Auctions have become very popular in recent years. Many public
institutions have appealed to this method to assign different projects to
companies like designing an IT infrastructure for a certain part of the
system or assigning the construction of a high way. Throughout the history,
auctions have been a relatively uncommon way to negotiate the exchange of
goods and commodities. The development of internet has led to a significant
rise in the use of auctions as auctioneers can solicit bids via the internet
from a wide range of buyers in a much wider range of commodities than
was previously practical.
In 2008, the National Auctioneers Association reported that the gross
revenue of the auction industry for that year was approximately $ 268.4
billion, with the fastest growing sectors being agricultural, machinery and
equipment auctions and residential real estate auctions.
Although the appearance of Internet has made auctions easier, wider
and simpler to access, there has been reported an increase number in
cheaters. Both in traditional and online ways, several strategies have been
developed to decrease the risk of paying a much higher price than it is
actually worth the item.
The question that arises is: isnt selling at an auction a gamble? There
is always a risk involved in anything we do, much more in selling an item.
There are several things to remember when participating at auctions
regardless of the type of role played. First would be that at auctions people
do not sell sentimental value items and buyers buy because they collect,
need or the item is a good deal. Second is many items sell very high at
auction and others dont but in the long term the items balance out. Thirdly
selling an item in good order will have a better price. And lastly most
auctioneers have a very good idea about the products worth.
For this paper, I will design an auction which takes place in an
organized environment. The auction has charitable purposes. Therefore,
items that are of public interest will be sold to attract more money for the
cause. Also, all the users of the auction will be registered prior to the event
and this will be the only way to bid for a product. The method is used for

multiple purposes, mainly for keeping a record for a seller/buyer keeping


track of completed transactions and has ratings from other users. The
auctions are first-price sealed type, so the highest bidder will have the item.
The auction will follow the general setup presented in the following
paragraphs.

Auction mathematical approach


Charity auctions are events where goods or services are sold to the
highest bidder in order to raise money for some type of charitable cause
(with a specific goal that will benefit the community like fundraising to
modernize a certain area of a hospital, for example). Some charity auctions
use private value goods to increase the price of the items and thus raising
more money for their cause. Usually it is organized a living auction or a
silent auction.
For the same item, we can have an all-pay auction for the same
charitable reasons, to raise more money for the cause. However, this type is
not widely accepted by people, even if this type resembles extraordinary
well with the case of lottery. Of course, we can also go the classic way with
the English type of auction, where first price will be the bidding winner.
To decide which type is better we have two ways: going instinctively
with the method that we suppose will bring us the most revenue from
selling the item, or we can choose the mathematical way as shown in a
Harvard study1.
We must develop basic definitions and assumptions, to describe the class of
auction. We will assume that there is one seller, us with the acorn in our
possession. We face n bidders, potential buyers, numbered 1,2,3 n. We let
N represent the set of bidders, so that N = {1, , n}.
We use i and j to represent typical bidders in N. The sellers problem
consists in not knowing how much the various bidders are willing to pay for
the acorn. For each bidder i, there is some quantity t i, which is the is value
estimate for the object and which represents the maximum amount which i
would be willing to pay for the object given his current information about it.
We can assume that the sellers uncertainty about the value estimate
of bidder i can be described by a continuous probability distribution over a
finite interval. We let ai represent the lowest possible value which i might
assign to the object and we let b i represent the highest prossible value
which i might assign to the object. We can have a function f i : [ai, bi] -> R+
be the probability density function for is estimate ti. We can now assume
that: - < ai < bi < + and fi(ti)>0 V ti belonging to the interval [ai, bi].

1 See bibliography page, first link accessed on January 7 th 2015.

fi(.) is a continuous function on [ai, bi]. Fi : [ai, bi] -> [0,1] will denote
the cumulative distribution function corresponding to the density f i(.) so
that
ti

Fi(ti) =

fi ( si ) dsi
ai

So, Fi(ti) is the sellers assement of the probability that bidder I has a
value estimate of ti or less. We let T denote the set of all possible
combinations of bidders value estimates.
T = [a1, b1] x x [an,bn]
For any bidder I, we let T-i denote the set of all possible combinations
of value estimates which might be held by bidders other than i, so that
T-i= X [aj, bj], j N , j != i
We will further assume that the values estimates of the n bidders are
stochastically independent random variables. Thus, the joint density
function on T for the vector t = (t1.tn) of individual value estimates is
f(t) =

fj(tj)

je N

Bidder i considers his own value estimate to be a known quantity, not


a random variable. However, we assume that bidder i assumes the
probability distributions for other bidders value estimates in the same way
as the seller does. That is, both seller and bidder asses the joint density
function on T-i for the vector t-i = (t1ti-1, ti+1,tn) of values for all
bidders other than i to be
f-i(t-i) =

fj(tj)

je N

The sellers personal value estimate for the object, if he were to keep
it and not sell it to any of the n bidders will be denoted as t0. We assume
that the seller has no private information about the object and t0 is known
to all bidders. There are two general reason why one bidders value
estimates may be unknown to the seller and the other bidders. The bidders
personal preferences might be unknown to the other agents. The bidder
might have some special information about the intrinsic quality of the
object. These factors can be noted as preference uncertainty and quality
uncertainty and the distinction is important.

The calculations go on keeping into account these factors further on.


The purpose of this mathematical demonstration is that we can have two
options when choosing what type of auction will give the maximum return of
investment for the item.

Listing items for Auction


We will design an auction that sells the acorn of the squirrel from
Ice Age movie series.
Since it is a childish item that can be
considered cute and touches a large
number of people who have viewed the
movies, we can easily consider the
charitable auction type.
Once an item is listed, a contract with the highest bidder will be
signed. Once listed, the seller that listed the item, in our case the acorn, is
obliged to sell his item at the highest bid price. Also, the user cannot sell
the acorn to anybody until the end of the auction is declared. In the end, the
seller must deliver the acorn within the time period specified.
In addition, once the auction is started, the seller cannot change the
starting bid, or if applies, the reserve price. The item must be described in a
truthful, complete and accurate manner. Any malfunctions, damage or
negative aspects should be reported immediately to the auctioneer.

Bidding on item
By bidding, the bidder is stating he is ready and has the willingness to
buy the acorn for that bid amount, plus any contractual disclosures on the
contract. If the final bid does not meet the requirement, the seller has no
obligation to sell. Except that case, the seller is entering a contract with the
highest bidder to sell the item. The buyer is obliged to deliver payment
within the contractual time specified.

Auction time and scheduling

The auction time is scheduled in the listing of all items to be sold. An


auction will last until there are no more offers for the item for the item (for
the acorn) or will end immediately if there are no offers at all.

After the auction


Both the seller and the highest bidder will be notified after the end of
a successful auction. If the acorn has been bought, the buyer and the seller
are expected to contact each other, as stated in the contract. Once the
contact has occurred, the payment and shipping arrangements will be
negotiated if not stated otherwise in the contract. When payment and
shipping is done, the transaction can be declared as complete. After a
period of time, usually one month, both parties are expected to meet and
rate each other.

Resolving disputes
Auction members are expected to conduct business with ethics and
honor system in their minds. All members in good have a rating to show
their integrity and if they have followed through with any commitments they
have made. But sometimes misleading may occur; procedural mistakes or
miscommunication can lead to (unwanted) disputes.
Disputes are resolved among the two involved parties and are not the
responsibility of the auction. Bigger or legal disputes must be resolved in
courts.

Cheating and prevention


Because we have chosen a charity type of auction where the highest
bidder wins the item, there can happen cheating. One way to cheat is the
bidder will bring a number of friends to will also bid to artificially raise the
price of the acorn to an overrated value.
To prevent this type of fraud, laws against it must be available on the
country where the auction takes place. In USA for example, there are laws
against price gouging.
Another method to prevent fraud is the item should be evaluated by
an expert prior to the start of auction to have a clear estimate for the price.

If the price goes higher than the estimate, we can question the highest
bidders and charge them with the fraud accusation. A third method is to
impose a maximum limit price that can be charged for given goods.

Bibliography/Sitography
1. http://www.eecs.harvard.edu/~parkes/cs286r/spring07/papers/myerson
.pdf accessed on January 7th, 2015
2. https://www.cs.purdue.edu/homes/bb/shillCounteractingbidding.pdf
accessed on January 6th, 2015
3. http://robotics.stanford.edu/~shoham/www%20papers/cheatingauctions-dss.pdf accessed on January 6th, 2015
4. What really matters in auction design by Paul Klemperer, August
2001
5. http://en.wikipedia.org/wiki/Price_gouging accessed on January 8th
2015