Auctions

Here's an interesting (but long) interview with Hal Varian about the impact of the internet on pricing.

You're probably familiar with auctions. In a simple "open outcry" auction bidders announce how much they are willing to bid. The bids increase until the one who bids highest gets the good. The problem with this format is that the last bidder overpays, because he pays more than everyone else thinks the product is worth. That's called the "winner's curse".

One way around that is to use a sealed bid auction, and award the good to the person who bids the most, but at the price bid by the second-highest bidder. That removes the premium paid by the highest bidder. That kind of auction is called a second-price auction or a Vickrey auction.

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