Midterm Exam Credit Instructions

Spring 2015
You may read the following papers and submit your written reports on them in order to
improve your exam score, as explained in our course syllabus. Completing this work may
improve your exam score, but cannot raise your grade on attendance, homework,
the project, or other exams. Note that if you turn in only one of these reading summaries,
it must be the rst one listed; if you turn in two, they must be the rst and second, etc. You
cannot pick and choose between them.
For each paper, you are provided with a list of questions. The rst question speci es which
parts of the paper you are expected to read, and asks for a general summary. I imagine that
an adequate summary will take approximately one half to one full typed, single-spaced page
of text1. In addition to summarizing the reading in your own words, you should answer each
of the other questions { depending on the question, a complete answer may take a sentence
or a full paragraph. If you feel unsure about whether you understand a question or whether
your answers are complete, you should feel free to talk to me about it.
The due date is March 18 (the Wednesday before spring break) at noon for the rst
report, and March 30 (the Monday after spring break) in class for the second and third
reports.
1. Counterspeculation, Auctions, and Competitive Sealed Tenders” William Vickrey,
Journal of Finance, Volume 16, Issue 1 (March 1961), 8-37.
(a) Read the introduction, Sections II (only pages 14-17) and III, and the Conclusion.
Summarize the main points of each of these sections.
(b) What was the motivating idea that inspired Vickrey’s study of auctions?
(c) The terminology in this paper is somewhat di?erent from the terminology we have
used in class. Identify the terms that we have used in class that are equivalent to
the following terms from the paper:
? Ordinary or progressive auction
? Homogeneous rectangular case
(d) Explain the meaning of the statement that the outcome of the ordinary or pro-
gressive auction is Pareto Optimal”. Will the outcome of the Dutch auction also
be Pareto Optimal? Why or why not?
(e) List the assumptions made in the analysis of the Dutch auction game.” What
elements are ruled out from the start?
(f) Quote the sentences in the article in which Vickrey proposes a new” type of sealed
bid auction (the rules that economists would later call the Vickrey auction). In the
discussion that follows his proposal, what are the advantages, possible problems,
and proposed solutions, of using this type of auction?
1I am not particular about the format, but if you are looking for formatting guidelines then I suggest 1
inch margins and 12 point font. The summary will be judged on whether it re
ects a thorough understanding
of the paper, not on whether it lls up a page
2. Vickrey Auctions in Practice: From Nineteenth Century Philately to Twenty- rst
Century Commerce” David Lucking Reiley, Journal of Economic Perspectives, Volume
14, Number 3 (Summer 2000), 183-192.
(a) Read the entire paper and write a summary of it. What are the central arguments
of the paper, and what evidence does the author use to support those arguments?
(b) What does it mean to say that optimal bidding in an auction isrobust”? In what
kind of auction is optimal bidding robust”, and why?
(c) When was the earliest proposal of the Vickrey-style auction? (Hint: you may have
to read the paper very thoroughly to nd the date.)
(d) What is absentee bidding, and what is its connection to the Vickrey auction?
(e) What does the author say about the possibility of the seller cheating in English
auctions versus in Vickrey auctions? Which one is harder?
(f) Discuss: if bidders expect sellers to cheat in a Vickrey auction, how will that a?ect
the bidder’s optimal bidding strategy?
3. Independent Private Value Auctions: Bidder Behaviour in First-, Second- and Third-
price Auctions With Varying Numbers of Bidders” John H. Kagel and Dan Levin, The
Economic Journal, 103 (July 1993), 868-879.
(a) Read the entire paper (but skip the appendix for now). In your summary, be sure
to describe the experimental setup and the experiment results.
(b) The introduction lists four ways that the third price auction contrasts with the
rst price and second price auctions. For each point, explain how that feature of
the third price auction is di?erent from the rst price auction and second price
auction. For example: point (1) is that bids exceed private values.” How is this
di?erent from the rst price auction { are bids greater than, equal to, or less than
private values? Is it the same, or di?erent, in the second price auction?
(c) Explain why bidders will bid above their valuation in the third price auction.
(d) What do the following acronyms stand for?
? IPV
? FPA, SPA, and TPA
? RNNE (This is a tricky one. Feel free to ask me for a clue, once you have
come up with your own best guess.)
? CARA
(e) Discuss: do the experimental results con rm the theoretical predictions?
(f) Now look at the Appendix. According to Case 1 in the applications that follow
the Theorem and Lemma:
? What is the risk neutral equilibrium for the kth price auction when the bid-
ders’ valuations are independently and identically distributed from a uniform
distribution on [x; x]?
? What is the risk neutral equilibrium in a fourth price auction with 9 bidders
whose valuations are independently and identically distributed from a uniform
distribution on [1:00; 18:00]