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U of M ECON 1101 - Introduction to Auctions

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ECON 1101 1st Edition Lecture 2Outline of Last Lecture I. Intro to EconomicsOutline of Current Lecture II. AuctionsA. Single-sided vs. Double-sidedB. Types of biddingC. Adding CompetitionD. Electricity AuctionsCurrent LectureAuctions: An important form of market exchanges (treasury bills, cell phone spectra, etc.) that happen every day and are relatively easy.Single-sided vs. Double-sided Auctions- “single” and “double” refer to the party that bids- Single-sidedo Only buyers OR only sellers bido Only one side can raise the priceo When sellers are bidding to sell the buyers something, prices drop.o When buyers are bidding to buy the product or service, prices increase.- Double-sidedo Both buyer and seller are bidding.o Sellers lower the price, buyers raise the price during the auction.Types of AuctionsThere are many types of auctions, but for now just worry about these two:Sealed Bid: done silently, bids are placed in an envelope, at the end of auction the envelopes areopened and the highest bidder wins, cannot change bid during the auctionOpen Outcry: normally an auctioneer present, bidders allowed to change bid, hear others bids, typical auction you see in the movies.Reserve Price: the price limit you set at an auction; sellers won’t sell for less than this, buyers won’t buy for more than this.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Adding CompetitionWhen there is only one seller it is called a monopoly. Sell prices increase. In competitive markets, demand drives the prices down. That is how competition works in a nutshell.Example: Two people open separate ice cream shops next to each other. Store A sells Ice cream cones for $1.00 and Store B sells ice cream cones for $0.75. When more people go to Store B, Store A reduces his/her prices down to $0.50 to attract buyers and beat out the competition.Collusion: secret or illegal conspiracy, especially in order to cheat or deceive others.Electricity AuctionsI. ISO receives bid from supplierII. Picks PRICE, QUANTITY, and WHO gets to sell (P, Q, & Who)III. In a Uniform Price Auction, everyone gets paid the same as long as they make the bid.a. Sellers bid closer to cost of production in these types of auctions.b. Example: on Moodle Slides Week 1 Lecture 1IV. Assume: suppliers can only sell ONE unit of electricityMAIN IDEA: PRICE IS HIGH WHEN DEMAND IS


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U of M ECON 1101 - Introduction to Auctions

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