second-price auction

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pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, AOL-Time Warner, Apollo 13, classic study, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Dutch auction, Erdős number, experimental subject, first-price auction, fudge factor, Garrett Hardin, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, power law, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, seminal paper, Simon Singh, slashdot, social contagion, social web, Steve Jobs, Steve Jurvetson, stochastic process, Ted Nelson, the long tail, The Market for Lemons, the strength of weak ties, The Wisdom of Crowds, trade route, Tragedy of the Commons, transaction costs, two and twenty, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

Here, the point is that bidders in a first-price auction will tend to bid lower than they do in a second-price auction, and in fact this lowering of bids will tend to offset what would otherwise look like a difference in the size of the winning bid. This consideration will come up as a central issue at various points later in the chapter. 9.4 Second-Price Auctions The sealed-bid second-price auction is particularly interesting, and there are a number of examples of it in widespread use. The auction form used on eBay is essentially a second-price auction. The pricing mechanism that search engines use to sell keyword-based advertising is a generalization of the second-price auction, as we will see in Chapter 15.

In the next sections, we sample the general flavor of some of these revenue issues by considering the alternative to VCG that the search industry has adopted in practice — a simple-to-describe auction called the Generalized Second Price auction that induces complex bidding behavior. 15.5 The Generalized Second Price Auction After some initial experiments with other formats, the main search engines have adopted a procedure for selling advertising slots called the Generalized Second Price auction (GSP). At some level, GSP — like VCG — is a generalization of the second-price auction for a single item. However, as will see, GSP is a generalization only in a superficial sense, since it doesn’t retain the nice properties of the second-price auction and VCG. In the GSP procedure, each advertiser j announces a bid consisting of a single number bj — the price it is willing to pay per click.

ENCOURAGING TRUTHFUL BIDDING IN MATCHING MARKETS: THE VCG PRINCIPLE453 In the case of a single-item auction, we saw in Chapter 9 that these problems are handled by running a second-price auction, in which the single item is awarded to the highest bidder at a price equal to the second-highest bid. As we showed there, truthful bidding is a dominant strategy for second-price auctions — that is, it is at least as good as any other strategy, regardless of what the other participants are doing. This dominant strategy result means that second-price auctions avoid many of the pathologies associated with more complex auctions. But what is the analogue of the second-price auction for advertising markets with multiple slots? Given the connections we’ve just seen to matching markets in the previous section, this turns out to be a special case of an interesting and fundamental question: how can we define a price-setting procedure for matching markets so that truthful reporting of valuations is a dominant strategy for the buyers?


pages: 298 words: 43,745

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen

AltaVista, AOL-Time Warner, barriers to entry, behavioural economics, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, content marketing, correlation does not imply causation, data science, en.wikipedia.org, first-price auction, folksonomy, Future Shock, information asymmetry, information retrieval, intangible asset, inventory management, life extension, linear programming, longitudinal study, machine translation, megacity, Nash equilibrium, Network effects, PageRank, place-making, power law, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search costs, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social bookmarking, social web, software as a service, stochastic process, tacit knowledge, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, Vilfredo Pareto, yield management

Auction theory research has lead to the development of several auction formats or types of auction markets. The format that we are most interested in is the Generalized Second Price auction and its poster-child auction, the Vickrey auction, as well as the generalized form, the Vickrey-Clarke-Groves auction. Potpourri: Google AdWords was the first sponsored-search platform that utilized the format now known as Generalized Second Price auction. The Serious Game of Bidding 181 The Generalized Second Price auction quickly became the standard for keyword auctions, with an amazingly broad impact on the Web and e-commerce. Although Hal Varian, the first Google chief economist, is best known as the face of Google AdWords, the credit for developing the Google AdWords system goes to Salar Kamangar, the ninth employee at Google, and Eric Veach, another early Google employee and Distinguished Engineer.

Google’s first sponsored-search auction was in February 2002, adopting Overture’s pay-per-click revenue model, but they continued their sales-by-impression model in parallel [12] before finally dropping it altogether in favor of the pay-per-click model. Additionally, Google’s sponsored-search model was introduced with some significant changes relative to the Overture model. First, developers of Google’s AdWords platform changed the pricing scheme from a first-price auction to a more stable second-price auction. In a single-item second-price auction, the highest bidder wins but only pays the second-highest bid price plus some small delta, which is a fancy word for additional amount. (Note: We’ll discuss the significance of this in Chapter 8 where we cover bidding practices.) Second, Google also changed the standard allocation scheme.

. • Bidder A bids $1.00 • Bidder B bids $1.10 • Bidder C bids $1.20 In this scenario, C wins the bid but pays only $1.11, because in the sponsored-search auction, advertisers do not pay their actual bid; instead, they pay the second-highest bid plus a small delta (i.e., a small change, think of it as one cent). This is the basis for the Generalized Second Price auction, which is one of the sponsored search’s most famous auction implementations. Recall that the search engine is the auctioneer, and the advertisers are also paying the search engine, as the search engine is also the seller of the resource (i.e., keyphrases). So, why would a search engine use the Generalized Second Price approach? It would seem in the Generalized Second Price auction that the search engine is getting 188 Understanding Sponsored Search less revenue because it is not getting the best price per keyword.


pages: 543 words: 153,550

Model Thinker: What You Need to Know to Make Data Work for You by Scott E. Page

Airbnb, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Alvin Roth, assortative mating, behavioural economics, Bernie Madoff, bitcoin, Black Swan, blockchain, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Checklist Manifesto, computer age, corporate governance, correlation does not imply causation, cuban missile crisis, data science, deep learning, deliberate practice, discrete time, distributed ledger, Easter island, en.wikipedia.org, Estimating the Reproducibility of Psychological Science, Everything should be made as simple as possible, experimental economics, first-price auction, Flash crash, Ford Model T, Geoffrey West, Santa Fe Institute, germ theory of disease, Gini coefficient, Higgs boson, High speed trading, impulse control, income inequality, Isaac Newton, John von Neumann, Kenneth Rogoff, knowledge economy, knowledge worker, Long Term Capital Management, loss aversion, low skilled workers, Mark Zuckerberg, market design, meta-analysis, money market fund, multi-armed bandit, Nash equilibrium, natural language processing, Network effects, opioid epidemic / opioid crisis, p-value, Pareto efficiency, pattern recognition, Paul Erdős, Paul Samuelson, phenotype, Phillips curve, power law, pre–internet, prisoner's dilemma, race to the bottom, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, Robert Solow, school choice, scientific management, sealed-bid auction, second-price auction, selection bias, six sigma, social graph, spectrum auction, statistical model, Stephen Hawking, Supply of New York City Cabdrivers, systems thinking, tacit knowledge, The Bell Curve by Richard Herrnstein and Charles Murray, The Great Moderation, the long tail, The Rise and Fall of American Growth, the rule of 72, the scientific method, The Spirit Level, the strength of weak ties, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, urban sprawl, value at risk, web application, winner-take-all economy, zero-sum game

When the price gets to $60, the second bidder exits. Therefore, the third bidder wins the auction and pays $60.4 In a second-price auction, each bidder submits a sealed bid. None of the other bidders see the amount. The object goes to the bidder who bids the largest amount. However, the bidder only pays an amount equal to the second-highest bid. The construction of the second-price auction makes telling the truth optimal. Imagine a bidder who values an object at $80 deciding how to bid in a second-price auction. We can assume that the other bidders have already submitted their bids. The bidder must consider three possible cases: the highest other bid could be less than $80, equal to $80, or more than $80.

In an ascending-bid auction, the strategy of staying in as long as the price is less than a bidder’s value requires a single step of reasoning: if the price is less than your value, buy it at this price. In the second-price auction, a bidder has to think through multiple contingencies to see that truthful revelation is optimal. Of course, once someone bids in several second-price auctions, she should learn that the optimal bid is to tell the truth. A last feature to consider is whether the auction encourages non-optimal behavior. In first- and second-price auctions, bidders submit their bids without knowing others’ bids. In an ascending-bid auction, bidders can see the price rise and are aware of who remains in the bidding.

Whether or not bidders change their values during the bidding process is a matter of conjecture. We need only recognize that it could happen. In first- and second-price auctions, bidders make a single bid, which allows no opportunity for emotional appeals during the auction. Finally, in the first-price auction and the ascending-bid auction, the price equals the highest bid. In the second-price auction, it equals the second-highest bid. This leaves the appearance that the seller could have received a higher price and, in part, explains why governments do not use second-price auctions. Imagine the headline if a government received three bids for oil rights, one at $6 million, one at $8 million, and one at $12 million: “Government Gets $12 Million Bid but Sells Land for $8 Million.”


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

Abraham Wald, Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, behavioural economics, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, classic study, clean water, conceptual framework, congestion pricing, constrained optimization, continuous double auction, creative destruction, data science, deferred acceptance, Donald Trump, Dutch auction, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, opioid epidemic / opioid crisis, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, power law, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Solow, Ronald Coase, school choice, school vouchers, scientific management, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, techno-determinism, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, WarGames: Global Thermonuclear War, winner-take-all economy

You might have the impression that the seller makes out badly in a second-price auction. After all, in using a first-price rather than second-price auction for the sale of Dice-K’s contract, it looks like Boston’s loss is the Seibu Lion’s gain: an extra $20,111,111.11 to be exact. But this fails to account for the fact that all teams might have bid more aggressively if they’d known that they would be paying the second highest bid if they won, rather than their own. That is, the auction rules change the bids that come in, and one of the points of a second-price auction is that it makes for higher bidding. Besides, it was concerns about overpayment that led to the crisis in the posting system in the first place: if the auction system breaks down completely, it isn’t good for anyone.7 Johann Wolfgang von Goethe, Amateur Auction Theorist It turned out that stamp collectors weren’t even the first to beat economists to the Vickrey auction.

A classic result in auction theory, the Revenue Equivalence Theorem, shows that, with appropriate assumptions on buyer and seller attributes like risk preferences, first- and second-price auctions can be expected to generate the same revenues for the seller, on average. Essentially, bidders in a first-price auction will shave their bids by “just enough” so that on average the amount paid to the seller is about the same. Sometimes it’ll be higher under a second-price auction, sometimes lower, but over time it’ll even out such that the choice between the two is, in theory, irrelevant. 8. This is a major issue in the design of broadband auctions, which sell internet bandwidth to cable and internet companies.

Vickrey’s classic auction study similarly began with a precise explanation of what was wrong with the standard first-price sealed-bid auction that was standard practice in procurement auctions for everything from highways to school supplies, the same mechanism that was used to sell Matsuzaka’s contract. By the time he was done, he’d unwittingly reinvented the stamp collectors’ auction of choice and laid the foundations for the field of auction design in the process. Vickrey described what he thought was a better way: the second-price sealed-bid auction, which is now known simply as a Vickrey auction. Then he proved mathematically that it just might be the best of all possible auctions that one could devise. He changed the auction industry from one that relied on an ad hoc choice of format to one built on design and optimization—a microcosm of economists’ larger role in society.


pages: 282 words: 80,907

Who Gets What — and Why: The New Economics of Matchmaking and Market Design by Alvin E. Roth

Affordable Care Act / Obamacare, Airbnb, algorithmic trading, barriers to entry, behavioural economics, Berlin Wall, bitcoin, Build a better mousetrap, centralized clearinghouse, Chuck Templeton: OpenTable:, commoditize, computer age, computerized markets, crowdsourcing, deferred acceptance, desegregation, Dutch auction, experimental economics, first-price auction, Flash crash, High speed trading, income inequality, Internet of things, invention of agriculture, invisible hand, Jean Tirole, law of one price, Lyft, market clearing, market design, medical residency, obamacare, PalmPilot, proxy bid, road to serfdom, school choice, sealed-bid auction, second-price auction, second-price sealed-bid, Silicon Valley, spectrum auction, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, The Wealth of Nations by Adam Smith, two-sided market, uber lyft, undersea cable

But if you raise your bid to above $120, you will win the auction and pay $120 (now the second-highest bid) for something that is worth only $100 to you. Bad move: you’ve converted a profit of zero into a loss of $20. So it’s safe to bid your true value in a second-price auction of this kind, since you can’t do better by bidding anything else. Notice that while a second-price auction makes it safe for bidders to bid the true value to them, it doesn’t necessarily impose a cost on the seller, even though the seller receives only the amount of the second-highest bid. That’s because in a first-price sealed bid auction, for example, it isn’t safe for bidders to bid their true value; they have to bid less than that if they are going to make any profit, since if they win the auction, they will have to pay the full amount of their bid.

Sometimes items are sold instead in “sealed bid” auctions: each bidder submits a bid without hearing the other bids, the bids are all opened at the same time, and the highest bidder wins, sometimes paying the amount of his bid and sometimes paying the amount of the second- highest bid. Paying the second-highest bid may sound odd, until you notice that in an ascending bid auction, the winning bidder pays the price at which the second-highest bidder dropped out. So in both an ascending bid auction and a second-price sealed bid auction, the highest bidder gets the object at the price just beyond what the second-highest bidder was willing to pay. Both of those auction formats make it easy to decide how much to bid, if you know how much the object is worth to you. That’s because if you think of the winning bidder’s profit as what the object is worth to him minus what he has to pay for it (and each losing bidder’s profit as zero), it’s perfectly safe for bidders to bid the object’s full true value to them in a sealed bid auction, or to stay in an ascending bid auction until the auctioneer reaches the full amount they are willing to pay.

That’s because if you think of the winning bidder’s profit as what the object is worth to him minus what he has to pay for it (and each losing bidder’s profit as zero), it’s perfectly safe for bidders to bid the object’s full true value to them in a sealed bid auction, or to stay in an ascending bid auction until the auctioneer reaches the full amount they are willing to pay. Win or lose, a bidder can’t make a higher profit by bidding something else. That isn’t obvious at all, but if you think about it carefully, you’ll see why it’s true. Consider the second-price sealed bid auction, in which the high bidder receives the object and pays the second-highest bid, while the other bidders pay nothing and receive nothing. By bidding less than the object’s true value, a bidder sometimes turns a profitable winning bid into a losing one, and by bidding more than the true value, he sometimes turns a losing bid into an unprofitable winning bid at which he pays more than the object was worth to him.


pages: 272 words: 83,798

A Little History of Economics by Niall Kishtainy

Alvin Roth, behavioural economics, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon tax, central bank independence, clean water, Corn Laws, Cornelius Vanderbilt, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Dr. Strangelove, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, Great Leap Forward, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, low interest rates, market clearing, market design, means of production, Minsky moment, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, Phillips curve, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

He devised a type of auction in which bidders have every incentive to be truthful. In standard sealed-bid auctions the winning bidders pay an amount equal to their own bid, the highest bid. Instead of the ‘first-price’ sealed-bid auction, Vickrey proposed a ‘second-price’ auction in which the winning bidder is the highest bidder but pays an amount equal to the second-highest bid. Suppose that in a second-price house auction you bid £250,000, rather than your true valuation of £300,000. Shading your bid wouldn’t affect how much you’d pay for the house should you turn out to be the highest bidder because you’d only pay the second-highest bid.

If you bid £250,000 for a house that you value at £300,000 then you might win and make a £50,000 profit, but you might be outbid and end up with nothing. If you hate risk you’ll tend to shade less, perhaps bidding £290,000. In the first-price auction your aversion to risk makes you bid close to your true valuation, and that’s what you’ll pay if you win. In the second-price auction, you’d only have to pay the second-highest bid. In this case it’s possible that the seller would get more money in a first-price than a second-price auction. There are many different kinds of auctions in theory, but in the real world economists have to tailor their designs to the context. The British economist Paul Klemperer (b. 1956) led a team that designed Britain’s third-generation mobile phone licence auction held in 2000.

Shading your bid wouldn’t affect how much you’d pay for the house should you turn out to be the highest bidder because you’d only pay the second-highest bid. But in bidding £250,000 you’d lose the house if someone else bid over £250,000, so the best you can do is to bid your true valuation. Vickrey wasn’t the first to have the idea. In the eighteenth century, the German writer Goethe sold a publisher one of his poems using a second-price auction. Today, eBay auctions work roughly according to the second-price principle, although they’re not true Vickrey auctions. One complication is that participants’ bids are revealed as the clock ticks, which encourages tactics like waiting until the last moment to place bids. The catch with Vickrey’s auction is that the seller has to settle for an amount equal to the second highest rather than the highest bid.


pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

Alvin Roth, An Inconvenient Truth, assortative mating, Bear Stearns, behavioural economics, Burning Man, business process, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Daniel Kahneman / Amos Tversky, Demis Hassabis, end world poverty, endowment effect, Exxon Valdez, first-price auction, Ford Model T, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, name-letter effect, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, search costs, second-price auction, Skinner box, software as a service, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

You decide how much to bid on it and offer a decidedly high amount. Are you aware that you are overbidding and that other people will not see your creation as you do? Or do you also think that others share your affinity for your creation? To find out, we compared the results of two different bidding procedures called first-price and second-price auctions. Without going too much into the technical differences,* if you were bidding using a second-price bidding procedure, you should carefully consider only how much you value your little paper creature.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it.

.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it. Why do we need this complexity? Here is the logic: if the creators realized that they were uniquely overimpressed with their own frogs and cranes, they would bid more when using the second-price auction (when only their value matters) than when using the first-price auction (when they should also take into account the values of others). In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures.

In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures. So did the origami builders understand that others didn’t see their creations as they did? We found that creators bid the same amount when they considered only their own evaluation for the product (second-price auction) as when they also considered what noncreators would bid for it (first-price auction). The lack of difference between the two bidding approaches suggested not only that we overvalue our own creations but also that we are largely unaware of this tendency; we mistakenly think that others love our work as much as we do.


The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

Albert Einstein, Arthur Eddington, business cycle, diversified portfolio, Dutch auction, first-price auction, German hyperinflation, Golden Gate Park, information asymmetry, invisible hand, junk bonds, Kenneth Arrow, low interest rates, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, Sam Peltzman, Savings and loan crisis, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

Because bidders are unlikely to reveal their bidding strategies in advance of the auction, the seller can never know for certain on any given night whether an English auction is preferable to, say, a Dutch auction. Even to decide between a first-price and a second-price sealed bid auction can be difficult for the seller. On the one hand, in a first-price auction he collects the high bid, while in a second-price auction he collects only the amount of the second-highest bid. On the other hand, bidders generally submit higher bids in a second-price auction. They submit even higher bids in a third-price auction. Which is best for the seller? Again the answer depends on who shows up to bid, and what the bidders' strategies are.

There is the Dutch auction, where an auctioneer calls out a very high price and successively lowers it until he receives an offer to buy. There is the first-price sealed bid auction, where each buyer submits a bid in an envelope, all are opened simultaneously, and the high bidder gets the item for the amount of his bid. There is the second-price sealed bid auction, where the high bidder gets the item but pays only the amount of the second-highest bid. There are third-, fourth-, and fifth-price sealed bid auctions. And there are more exotic possibilities. In the Glum Losers auction, the high bidder gets the item for free and everybody else pays the amount of his own bid.

Under certain reasonable assumptions (about which I will soon say more), and as a matter of mathematical fact, all of the auction rules I've mentioned yield the same revenue to the seller on average over many auctions. If I regularly sell merchandise at English auctions, while you sell at Dutch auctions, your brother sells at first-price sealed bid auctions, your sister sells at second-price sealed bid auctions, and your crazy Uncle Fester sells at Glum Losers auctions, and if we all sell merchandise of comparable quality, then in the long run we must all do equally well. This result applies as well to a vast number of other auction rules—in fact, to any rule you can imagine that does not involve some entrance fee to the auction hall or its equivalent.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, classic study, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, decentralized internet, Deng Xiaoping, Dutch auction, electricity market, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Great Leap Forward, Hacker News, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, independent contractor, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John Perry Barlow, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Robert Solow, Ronald Coase, Ronald Reagan, sealed-bid auction, search costs, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, world market for maybe five computers, Xiaogang Anhui farmers, yield management

An alternative way of running the bidding is the Dutch auction, used to sell flowers at Aalsmeer, in which the price starts high and falls until a bidder claims the item. Another is the sealed-bid auction, in which there is a single round of sealed bids; the high bidder wins and pays his or her bid. Commercial real estate is sometimes sold this way. A variant is the second-price auction, in which there is a single round of bidding and the high bidder wins, but unlike first-price auctions, the price paid is the second-highest bid. Second-price auctions are used for selling stamps. eBay chose open auctions. Economic theory endorses this decision: the open auction yields, on average, a price that is closer to the item’s true value than do the other forms of auction.3 This is because bidders have more information in an open auction.

Journal of Political Economy 92, 991–1016. ————. 1996. “Report on the Design and Testing of an Applicant Proposing Matching Algorithm, and Comparison with the Existing NPRM Algorithm.” www.economics.harvard.edu/~aroth/phase1.html. Roth, Alvin E., and Ockenfels, Axel. 2000. “Last Minute Bidding and the Rules for Ending Second-Price Auctions.” Unpublished, Harvard University, Cambridge. Roth, Alvin E., and Peranson, Elliot. 1999. “A Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design.” American Economic Review 89, 748–780. Roth, Alvin E., Prasnikar, Vesna, Okuno-Fujiwara, Masahiro, and Zamir, Shmuel. 1991.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, An Inconvenient Truth, assortative mating, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, cognitive load, compensation consultant, computer vision, Cornelius Vanderbilt, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, Donald Trump, end world poverty, endowment effect, Exxon Valdez, fake it until you make it, financial engineering, first-price auction, Ford Model T, Frederick Winslow Taylor, fudge factor, Garrett Hardin, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, John Perry Barlow, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, name-letter effect, new economy, operational security, Pepsi Challenge, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, search costs, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skinner box, Skype, social contagion, software as a service, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, ultimatum game, Upton Sinclair, Walter Mischel, young professional

You decide how much to bid on it and offer a decidedly high amount. Are you aware that you are overbidding and that other people will not see your creation as you do? Or do you also think that others share your affinity for your creation? To find out, we compared the results of two different bidding procedures called first-price and second-price auctions. Without going too much into the technical differences,* if you were bidding using a second-price bidding procedure, you should carefully consider only how much you value your little paper creature.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it.

.* In contrast, if you were bidding using a first-price bidding procedure, you should take into consideration both your own love for the object and how much you think others will bid for it. Why do we need this complexity? Here is the logic: if the creators realized that they were uniquely overimpressed with their own frogs and cranes, they would bid more when using the second-price auction (when only their value matters) than when using the first-price auction (when they should also take into account the values of others). In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures.

In contrast, if the creators did not realize that they were the only ones who overvalued their origami and they thought that others shared their perspective, they would bid a similarly high amount in both bidding procedures. So did the origami builders understand that others didn’t see their creations as they did? We found that creators bid the same amount when they considered only their own evaluation for the product (second-price auction) as when they also considered what noncreators would bid for it (first-price auction). The lack of difference between the two bidding approaches suggested not only that we overvalue our own creations but also that we are largely unaware of this tendency; we mistakenly think that others love our work as much as we do.


pages: 476 words: 121,460

The Man From the Future: The Visionary Life of John Von Neumann by Ananyo Bhattacharya

Ada Lovelace, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, Alvin Roth, Andrew Wiles, Benoit Mandelbrot, business cycle, cellular automata, Charles Babbage, Claude Shannon: information theory, clockwork universe, cloud computing, Conway's Game of Life, cuban missile crisis, Daniel Kahneman / Amos Tversky, DeepMind, deferred acceptance, double helix, Douglas Hofstadter, Dr. Strangelove, From Mathematics to the Technologies of Life and Death, Georg Cantor, Greta Thunberg, Gödel, Escher, Bach, haute cuisine, Herman Kahn, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jacquard loom, Jean Tirole, John Conway, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, linear programming, mandelbrot fractal, meta-analysis, mutually assured destruction, Nash equilibrium, Norbert Wiener, Norman Macrae, P = NP, Paul Samuelson, quantum entanglement, RAND corporation, Ray Kurzweil, Richard Feynman, Ronald Reagan, Schrödinger's Cat, second-price auction, side project, Silicon Valley, spectrum auction, Steven Levy, Strategic Defense Initiative, technological singularity, Turing machine, Von Neumann architecture, zero-sum game

The second-highest bidder secures the second-most prominent position on the results page – and pays the third-highest bid, and so on. Designing and perfecting these ‘generalized second price’ auctions brought the first wave of game theorists into tech firms. For a brief history and review of such auctions, see one of the most cited economics papers of this century: Benjamin Edelman, Michael Ostrovsky and Michael Schwarz ‘Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords’, American Economic Review, 97(1) (2007), pp. 242–59. 81. W. D. Hamilton, 1996, Narrow Roads of Gene Land, vol. 1: Evolution of Social Behaviour, Oxford University Press, Oxford. 82.

The same year the three laureates would receive their gold medals from the king of Sweden, the US government was preparing to auction bands of the radio spectrum to telecoms firms. Thousands of licences worth billions of dollars were at stake. Many past sell-offs had flopped.72 In New Zealand, a botched ‘second-price’ auction, in which the winner only pays the second-highest bid, resulted in a firm that bid NZ$7 million paying NZ$5,000; and a university student picking up a licence to run a television network for a small city for nothing – because no one else had bid. Under pressure to avoid such pitfalls, the Federal Communications Commission (FCC) asked for proposals and adopted a system designed by game theorists including Paul Milgrom and Robert Wilson.


pages: 597 words: 119,204

Website Optimization by Andrew B. King

AltaVista, AOL-Time Warner, bounce rate, don't be evil, Dr. Strangelove, en.wikipedia.org, Firefox, In Cold Blood by Truman Capote, information retrieval, iterative process, Kickstarter, machine readable, medical malpractice, Network effects, OSI model, performance metric, power law, satellite internet, search engine result page, second-price auction, second-price sealed-bid, semantic web, Silicon Valley, slashdot, social bookmarking, social graph, Steve Jobs, the long tail, three-martini lunch, traumatic brain injury, web application

Optimizing Bids PPC programs use an auction that is like a second-price sealed bidding system with private values. This means you do not know how much your competitors are bidding. Everyone has different bids for each keyword. Typically, people overbid in second-price auctions with private values. The larger the number of competing bidders and the more uncertain the value of what is being bid on, the more extreme the overbidding gets. A PPC auction is a little more complicated than a second-price auction because multiple positions are being bid on simultaneously and Quality Score factors affect rankings. The lesson from this is if you don't want to lose money, you need to figure out the value that keywords have for you.

If you'd rather be middle of the road, you should build up your account from a set of strong keywords and work from an initial budget calculation such as the one in "Differences in Minimum Bids and Quality Scoring," described earlier in this chapter. Using the numbers from "Closing the Loop," also earlier in this chapter, with a conversion rate of 6% and a value per conversion of $20, you will break even with a CPC of $1.20: ($20 / conversion * 6 conversions) / 100 clicks = $1.20 / click The dominant strategy in a second-price sealed auction is to set your maximum CPC to $1.20. However, in PPC, you are not bidding for one item. Your ad may show in a range of positions. Assuming that your conversion rates do not depend on position (a reasonable assumption), you will want to show your ad in lower positions if it brings roughly the same amount of traffic, because it will be cheaper.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Alan Greenspan, Bear Stearns, behavioural economics, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, compensation consultant, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, John Perry Barlow, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, Pepsi Challenge, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skinner box, Skype, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Upton Sinclair

approach to dining with friends in, 248–50 with lines to get in, 36, 37 menu pricing of, 4 ordering in, 231–38; see also ordering food or drinks social norms of dating and, 75–76 retirement, saving for, xiii from perspective of standard economics vs. behavioral economics, 241 revenge, 307–9 as enforcement mechanism, 309 pleasure of, 307–8 rewards: delayed gratification and, 261–64 financial, job performance and, 320–21 reinforcement schedules and, 257–58 unpredictable, learned helplessness and, 312–16 see also bonuses robberies, 195 romantic relationships: options in, 142, 148, 150 separation of social and market norms and, 69, 75–76, 250 see also dating Roth, Al, xviii royal touch, 188 Rustichini, Aldo, 76–77 S safe sex, 100–102 and willingness to engage in unprotected sex when aroused, 89, 95, 96–97, 99, 107 salaries, 16–19, 88 of bankers, calculating right amount of, 319–24 of CEOs, 16–17, 18, 310 co-workers’ comparisons of, 16 excessive, erosion of public trust and, 310, 311 executive, public outcry over, 306, 310, 311, 319–20 happiness and, 17–18 and move from hourly rates to monthly pay, 80 performance-based, in education, 85 relinquishing dreams for increase in, 18–19 “save more tomorrow” mechanism and, 242 willingness to risk life and, 84 see also bonuses; compensation sale prices, 148–49 relativity and, 19–20 Sarbanes-Oxley Act of 2002, 204, 205–6 savings, 109–11 decline in rate of, 109–10 defeating procrastination in, 122–26 401(k)s and, xiii planning fallacy and, 303–4 for retirement, from perspective of standard economics vs. behavioral economics, 241 “save more tomorrow” mechanism and, 242 self-control credit card and, 123–26 Sawyer, Tom, 24–25, 39–40, 42–43 Schmalensee, Richard, 92 schools: soda machines at, 204 see also education second price auctions, 28n Securities and Exchange Commission (SEC), 205 self-control, 109–26, 255–65 credit cards and, 123–26 decline in savings rate and, 109–10 e-mail and, 255–59 effectiveness of external voice and, 116–17 patient compliance and, 260–64 procrastination of university students and, 111–16 self-destructive behaviors, 264–65 government regulation and, 118 self-herding, 37–38 self-reliance, 68 thinking about money and, 74–75 self-shame, debt blogging and, 122–23 Seligman, Martin, 312-13 sensei (martial arts master), offering pay to, 71–72 Seven Pounds, 255 sex: and likelihood of engaging in immoral behaviors, 94–95, 96, 97, 107 and preferences in “cold” vs. aroused state, 89, 94, 96, 97, 106 safe vs. unprotected, 89, 95, 96–97, 99, 100–102, 107 in social vs. market context, 68–69 as taboo subject for study, 92 sex education, 101 sexual arousal: decision making under, 89–102, 106–8 see also arousal Shakespeare, William, xxviii–xxix, 188, 232, 239–40 Shampanier, Kristina, 51, 339 Shin, Jiwoong, 142–43, 147, 339–40 Shin, Margaret, 169 shipping, FREE!

Look for someone whose sibling is married to a productivity-challenged individual. * Of course, physicians have other problems as well, including insurance forms, bureaucracy, and threats of lawsuits for malpractice. * The price the highest bidder paid for an item was based not on his own bid, but on that of the second highest bidder. This is called a second price auction. William Vickrey received the Nobel prize in economics for demonstrating that this type of auction creates the conditions where it is in people’s best interest to bid the maximum amount they are willing to pay for each item (this is also the general logic behind the auction system on eBay)


pages: 666 words: 181,495

In the Plex: How Google Thinks, Works, and Shapes Our Lives by Steven Levy

"World Economic Forum" Davos, 23andMe, AltaVista, Andy Rubin, Anne Wojcicki, Apple's 1984 Super Bowl advert, autonomous vehicles, Bill Atkinson, book scanning, Brewster Kahle, Burning Man, business process, clean water, cloud computing, crowdsourcing, Dean Kamen, discounted cash flows, don't be evil, Donald Knuth, Douglas Engelbart, Douglas Engelbart, Dutch auction, El Camino Real, Evgeny Morozov, fault tolerance, Firefox, General Magic , Gerard Salton, Gerard Salton, Google bus, Google Chrome, Google Earth, Googley, high-speed rail, HyperCard, hypertext link, IBM and the Holocaust, informal economy, information retrieval, Internet Archive, Jeff Bezos, John Markoff, Ken Thompson, Kevin Kelly, Kickstarter, large language model, machine translation, Mark Zuckerberg, Menlo Park, one-China policy, optical character recognition, PageRank, PalmPilot, Paul Buchheit, Potemkin village, prediction markets, Project Xanadu, recommendation engine, risk tolerance, Rubik’s Cube, Sand Hill Road, Saturday Night Live, search inside the book, second-price auction, selection bias, Sheryl Sandberg, Silicon Valley, SimCity, skunkworks, Skype, slashdot, social graph, social software, social web, spectrum auction, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Levy, subscription business, Susan Wojcicki, Ted Nelson, telemarketer, The future is already here, the long tail, trade route, traveling salesman, turn-by-turn navigation, undersea cable, Vannevar Bush, web application, WikiLeaks, Y Combinator

Overture required its advertisers to pick specific keywords; Google would match an ad to many keywords, some of them with subtle connections discovered by analysis of the behavior of its millions of users. Overture concentrated on high-value accounts that it sold by hand. Google built a self-service system that allowed it to accommodate hundreds of thousands of advertisers. Overture did implement some of Google’s innovations, such as the second-price auction. But by then AdWords had left Overture and Yahoo in the dust. (Bill Gross would later shrug off the fact that his ideas involving pay per click and ad auctions had made billionaires at Google but not at Idealab. “I feel we won,” he says. “There was the satisfaction of breaking the code. We originally invested $200,000 in GoTo, and when we sold Overture, we made $200 million.

AdWords Select rolled out in February 2002. The AOL deal went into effect in May. Suddenly, Google’s financial crisis was over. Now Google had a cash cow that would fund the next decade’s worth of projects, from brilliant to lunatic. In 2007, writing about the “spectacular commercial success” of the second-price auction model, economists at Stanford, Harvard, and the University of California at Berkeley described it as “the dominant transaction mechanism in a large and rapidly growing industry.” Before AdWords Select and the AOL deal, Eric Schmidt often passed by Sheryl Sandberg’s cubicle and asked her how many advertisers Google had.

Anderson (who is my editor at Wired) later wrote a best-selling book with the same title. 85 Yossi Vardi “Interview with Sergey Brin,” Haaretz.com, June 2, 2008. 90 So Veach devised I described the workings of Google’s ad model in “Secret of Googlenomics,” Wired, April 2009. 94 “That’s really satisfying” Brin told me this while I was researching “The World According to Google,” Newsweek, December 16, 2002. 95 Overture’s failures Flake presented his slide show, “How Google Won the Search Engine Wars,” at the Marketing 3.0 conference in New York City, April 25, 2009. 99 “the dominant transaction mechanism” Benjamin Edelman, Michael Ostrovsky, and Michael Schwarz, “Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords,” American Economic Review, March 2007. 101 “many synergies” Amy Harmon, “Google Deal Ties Company to Weblogs,” The New York Times, February 17, 2003. 102 “The potential exists” Danny Sullivan, “Google Throws Hat into the Contextual Advertising Ring,” Search Engine Watch, March 4, 2003. 102 “We could change the economics” Wojcicki called me at Newsweek in 2003 to explain the product. 105 In 2008, a story Nicholas Carlson, “Google’s Worst Ads, Ever,” Business Insider, August 20, 2009. 106 In May 2010 Neal Mohan, “The AdSense Revenue Share,” Google Inside AdSense blog, May 24, 1010.


Mining of Massive Datasets by Jure Leskovec, Anand Rajaraman, Jeffrey David Ullman

cloud computing, crowdsourcing, en.wikipedia.org, first-price auction, G4S, information retrieval, John Snow's cholera map, Netflix Prize, NP-complete, PageRank, pattern recognition, power law, random walk, recommendation engine, second-price auction, sentiment analysis, social graph, statistical model, the long tail, web application

Charging Advertisers for Clicks: In our simplified model, when a user clicks on an advertiser’s ad, the advertiser is charged the amount they bid. This policy is known as a first-price auction. In reality, search engines use a more complicated system known as a second-price auction, where each advertiser pays approximately the bid of the advertiser who placed immediately behind them in the auction. For example, the first-place advertiser for a search might pay the bid of the advertiser in second place, plus one cent. It has been shown that second-price auctions are less susceptible to being gamed by advertisers than first-price auctions and lead to higher revenues for the search engine. 8.4.5A Lower Bound on Competitive Ratio for Balance In this section we shall prove that in the simple case of the Balance Algorithm that we are considering, the competitive ratio is 3/4.

., 67 S-curve, 84, 93 Saberi, A., 291 Salihoglu, S., 66 Sample, 215, 218, 221, 223, 242, 249, 253 Sampling, 127, 141 Savasere, A., 226 SCC, see Strongly connected component Schapire, R.E., 458 Schema, 30 Schutze, H., 18 Score, 105 Search ad, 268 Search engine, 166, 181 Search query, 125, 155, 176, 268, 285 Second-price auction, 279 Secondary storage, see Disk Selection, 31, 33 Sensor, 124 Sentiment analysis, 422 Set, 76, 112, see also Itemset Set difference, see Difference Shankar, S., 67 Shawe-Taylor, J., 458 Shi, J., 383 Shim, K., 266 Shingle, 72, 85, 109 Shivakumar, N., 226 Shopping cart, 193 Shortest paths, 42 Siddharth, J., 122 Signature, 75, 78, 85 Signature matrix, 78, 83 Silberschatz, A., 153 Silberstein, A., 67 Similarity, 4, 15, 69, 191, 299, 306 Similarity join, 52, 58 Simrank, 357 Singleton, R.C., 153 Singular value, 397, 401, 402 Singular-value decomposition, 312, 384, 397, 406 Six degrees of separation, 369 Sketch, 100 Skew, 26 Sliding window, 126, 142, 148, 257 Smart transitive closure, 372 Smith, B., 324 SNAP, 382 Social Graph, 326 Social network, 16, 325, 326, 384 SON Algorithm, 217 Source, 367 Space, 87, 228 Spam, see also Term spam, see also Link spam, 328, 421 Spam farm, 178, 180 Spam mass, 180, 181 Sparse matrix, 28, 76, 77, 168, 293 Spectral partitioning, 343 Spider trap, 161, 164, 184 Splitting clusters, 255 SQL, 19, 30, 66 Squares, 366 Srikant, R., 226 Srivastava, U., 67 Standard deviation, 245, 247 Standing query, 125 Stanford Network Analysis Platform, see SNAP Star join, 50 Stata, R., 18, 190 Statistical model, 1 Status, 287 Steinbach, M., 18 Stochastic gradient descent, 320, 445 Stochastic matrix, 158, 385 Stop clustering, 234, 238, 240 Stop words, 7, 74, 110, 194, 298 Stream, see Data stream Strength of membership, 355 String, 112 Striping, 29, 168, 170 Strong edge, 328 Strongly connected component, 159, 374 Strongly connected graph, 158, 368 Substochastic matrix, 161 Suffix length, 116 Summarization, 3 Summation, 147 Sun, J., 414 Supercomputer, 19 Superimposed code, see Bloom filter, 152 Supermarket, 193, 214 Superstep, 43 Supervised learning, 415, 417 Support, 192, 216, 218, 221 Support vector, 437 Support-vector machine, 17, 415, 419, 436, 455 Supporting page, 178 Suri, S., 383 Surprise number, 137 SVD, see Singular-value decomposition SVM, see Support-vector machine Swami, A., 226 Symmetric matrix, 346, 384 Szegedy, M., 152 Tag, 298, 329 Tail, 372 Tail length, 135, 376 Tan, P.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

If the highest outside bid is $110, you won't get the object, but you wouldn't have wanted to pay $110 for it anyway. A little time with pencil and paper will show that you can never lose by bidding your true valuation, but you { 102} John Kay might lose out if you enter a false value. Alone among bidding procedures, this "second-price auction" has the property of incentive compatibility: there is no benefit from strategic behavior. The mechanism sounds arcane and theoretical. It was proposed by an American economist, William Vickrey,n who received the Nobel Prize in 1996 for his analysis of this and similar problems. 18 But the Vickrey scheme is, in essence, the allocation mechanism that was used to decide what should be done with the Portrait ofDr.

., 116 Rousseau, Jean-Jacques, 242,247,253,290 Roux,Paul,85-86,89,90, 137,180,293 rule oflaw, 13, 75, 254, 352 rules, 73-82 Russia debt default (1998), 237 privatization in, 11, 13, 128, 288, 295, 306-7,319,344,355 See also Soviet Union Sachs, Jeffrey, 335 Samuelson, Paul, 179,210,324,330,335,359 San Remo flower market, 14, 146-48, 149, 151-52 Say,Jean-Baptiste, 174, 175, 179 Scherer, Mike, 334 Scholes, Myron, 159, 160-61, 237, 359 Scottish Enlightenment, 83, 126 "second-price auction," 102, 103 securities markets, 91, 92, 148 bonds, 50, 167-69 derivatives, 160-61, 237 and efficient market hypothesis, 236 "equity premium," 235 inception of, 55 investment strategy, 300 knowledge transmission, 270-71 speculation, 150, 151,341 traders' compensation, 321 valuation, 170-71 See also risk; stock markets self-interest, 11, 12-13, 16, 17, 20, 78, 127, 314,327,340 adaptive, 217, 252, 256, 343 American business model, 21, 62,313, 314-18,343-44 and cooperation, 247-48,250,253, 255-56,320 in politics, 12, 250-51 and redistributive market liberalism, 314-15 and Smith (Adam), 197-98 values of, 315-18,342,347 self-regarding materialism, 198,207,217, 315-18 expectation/achievement gap, 286,287 nonmaterialist motives vs., 320, 340 public goods vs., 248 rationality as, 210, 212, 219, 347 self-perpetuating, 216 social norms vs., 255 self-regulation, 349 Sen, Amartya, 327, 359 settlements.


pages: 496 words: 154,363

I'm Feeling Lucky: The Confessions of Google Employee Number 59 by Douglas Edwards

"World Economic Forum" Davos, Albert Einstein, AltaVista, Any sufficiently advanced technology is indistinguishable from magic, AOL-Time Warner, barriers to entry, book scanning, Build a better mousetrap, Burning Man, business intelligence, call centre, commoditize, crowdsourcing, don't be evil, Dutch auction, Elon Musk, fault tolerance, Googley, gravity well, invisible hand, Jeff Bezos, job-hopping, John Markoff, Kickstarter, machine translation, Marc Andreessen, Menlo Park, microcredit, music of the spheres, Network effects, PageRank, PalmPilot, performance metric, pets.com, Ralph Nader, risk tolerance, second-price auction, Sheryl Sandberg, side project, Silicon Valley, Silicon Valley startup, slashdot, stem cell, Superbowl ad, Susan Wojcicki, tech worker, The Turner Diaries, Y2K

He envisioned an eBay-type auction where the advertiser would pay the minimum amount necessary to win a position in the rankings. Eric had never heard of William Vickrey, the Nobel laureate who had created a "second-price auction" model; he worked out the idea himself. It just made sense to him that instead of charging as much as an advertiser was willing to pay, we should automatically lower the cost to the minimum amount required. Then advertisers would have no incentive to lower their bids, but they would have an incentive to raise them when the bids below theirs increased. At first, Salar resisted the idea of a second-price auction, because it would confuse advertisers. They would have to trust us to lower their bids, and Salar wasn't sure they would be willing to do that.


pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

Alvin Roth, barriers to entry, business cycle, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, information asymmetry, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, payment for order flow, power law, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, selection bias, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game, zero-sum game

., 1996, Stochastic Processes (John Wiley, New York). Roth, Alvin E., 1995, Bargaining experiments, in John H. Kagel, and Alvin E. Roth, eds., The Handbook of Experimental Economics (Princeton University Press, Princeton, NJ). Roth, Alvin E., and Axel Ockenfels, 2002, Last-minute bidding and the rules for ending second-price auctions: Evidence from eBay and Amazon auctions on the internet, American Economic Review 92, 1093–103. Rubinstein, Ariel, 1982, Perfect equilibrium in a bargaining model, Econometrica 50, 97–110. Rust, John, John H. Miller, and Richard Palmer, 1993. Behavior of trading automata in a computerized double auction market, in Daniel Friedman, and John Rust, eds., The Double Auction Market Institutions, Theories and Evidence, Proceedings Volume XIV, Santa Fe Institute (Addison-Wesley, Reading, MA).


pages: 463 words: 105,197

Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Big Tech, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, congestion pricing, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, data science, deep learning, DeepMind, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, gamification, Garrett Hardin, George Akerlof, global macro, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Jeremy Corbyn, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, pre–internet, radical decentralization, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Ronald Coase, Rory Sutherland, search costs, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, trickle-down economics, Tyler Cowen, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, vertical integration, women in the workforce, Zipcar

While they acknowledge that holdout problems, and related problems of strategic behavior, can interfere with the transfer of property, they largely consider these problems as confined to cases where the use of property affects many people, as in the case of factory pollution. 29. See Benjamin Edelman, Michael Ostrovsky, & Michael Schwarz, Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars’ Worth of Keywords, 97 American Economic Review 242 (2007); Hal R. Varian, Position Auctions, 25 International Journal of Industrial Organization 1163 (2007). 30. R. H. Coase, The Federal Communications Commission, 2 Journal of Law and Economics 1 (1959); Thomas W.


pages: 559 words: 155,372

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez

Airbnb, airport security, always be closing, Amazon Web Services, Big Tech, Burning Man, business logic, Celtic Tiger, centralized clearinghouse, cognitive dissonance, collective bargaining, content marketing, corporate governance, Credit Default Swap, crowdsourcing, data science, deal flow, death of newspapers, disruptive innovation, Dr. Strangelove, drone strike, drop ship, El Camino Real, Elon Musk, Emanuel Derman, Fairchild Semiconductor, fake it until you make it, financial engineering, financial independence, Gary Kildall, global supply chain, Goldman Sachs: Vampire Squid, Hacker News, hive mind, How many piano tuners are there in Chicago?, income inequality, industrial research laboratory, information asymmetry, information security, interest rate swap, intermodal, Jeff Bezos, Kickstarter, Malcom McLean invented shipping containers, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, means of production, Menlo Park, messenger bag, minimum viable product, MITM: man-in-the-middle, move fast and break things, Neal Stephenson, Network effects, orbital mechanics / astrodynamics, Paul Graham, performance metric, Peter Thiel, Ponzi scheme, pre–internet, public intellectual, Ralph Waldo Emerson, random walk, Reminiscences of a Stock Operator, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, Scientific racism, second-price auction, self-driving car, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social graph, Social Justice Warrior, social web, Socratic dialogue, source of truth, Steve Jobs, tech worker, telemarketer, the long tail, undersea cable, urban renewal, Y Combinator, zero-sum game, éminence grise

In many ways, FBX is an SSP, except that unlike most SSPs, which try to sign as many publishers as possible, this one has only one big client: Facebook itself. * That didn’t mean FBX’s marginal contribution to FB revenue was as dramatic as the difference in bid. Like most online ad auctions, Facebook ran a “second price” auction. The economic specifics are PhD level, but essentially it meant you paid the amount of the next-highest bid, rather than what you bid. If one did the math, it meant a much better price-discovery mechanism overall. To truly increase total revenue, you needed a density of bids at the “clearing price” the ad impression had sold for, pushing the aggregate prices paid upward.


pages: 998 words: 211,235

A Beautiful Mind by Sylvia Nasar

Al Roth, Albert Einstein, Andrew Wiles, Bletchley Park, book value, Brownian motion, business cycle, cognitive dissonance, Columbine, Dr. Strangelove, experimental economics, fear of failure, Gunnar Myrdal, Henri Poincaré, Herman Kahn, invisible hand, Isaac Newton, John Conway, John Nash: game theory, John von Neumann, Kenneth Arrow, Kenneth Rogoff, linear programming, lone genius, longitudinal study, market design, medical residency, Nash equilibrium, Norbert Wiener, Paul Erdős, Paul Samuelson, prisoner's dilemma, RAND corporation, Robert Solow, Ronald Coase, second-price auction, seminal paper, Silicon Valley, Simon Singh, spectrum auction, Suez canal 1869, The Wealth of Nations by Adam Smith, Thorstein Veblen, upwardly mobile, zero-sum game

As Congress and the FCC inched closer to the notion of auctioning off spectrum rights, Australia and New Zealand both conducted spectrum auctions.19 That they proved to be costly flops and political disasters illustrated that the devil really was in the details. In New Zealand, the government ran a so-called second price auction, and newspapers were full of stories about winners who paid far below their bids. In one case, the high bid was NZ$7 million, the second bid NZ$5,000, and the winner paid the lower price. In another, an Otago University student bid NZ$1 for a television license in a small city. Nobody else bid, so he got it for one dollar.


pages: 523 words: 143,139

Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian, Tom Griffiths

4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, algorithmic bias, algorithmic trading, anthropic principle, asset allocation, autonomous vehicles, Bayesian statistics, behavioural economics, Berlin Wall, Big Tech, Bill Duvall, bitcoin, Boeing 747, Charles Babbage, cognitive load, Community Supported Agriculture, complexity theory, constrained optimization, cosmological principle, cryptocurrency, Danny Hillis, data science, David Heinemeier Hansson, David Sedaris, delayed gratification, dematerialisation, diversification, Donald Knuth, Donald Shoup, double helix, Dutch auction, Elon Musk, exponential backoff, fault tolerance, Fellow of the Royal Society, Firefox, first-price auction, Flash crash, Frederick Winslow Taylor, fulfillment center, Garrett Hardin, Geoffrey Hinton, George Akerlof, global supply chain, Google Chrome, heat death of the universe, Henri Poincaré, information retrieval, Internet Archive, Jeff Bezos, Johannes Kepler, John Nash: game theory, John von Neumann, Kickstarter, knapsack problem, Lao Tzu, Leonard Kleinrock, level 1 cache, linear programming, martingale, multi-armed bandit, Nash equilibrium, natural language processing, NP-complete, P = NP, packet switching, Pierre-Simon Laplace, power law, prediction markets, race to the bottom, RAND corporation, RFC: Request For Comment, Robert X Cringely, Sam Altman, scientific management, sealed-bid auction, second-price auction, self-driving car, Silicon Valley, Skype, sorting algorithm, spectrum auction, Stanford marshmallow experiment, Steve Jobs, stochastic process, Thomas Bayes, Thomas Malthus, Tragedy of the Commons, traveling salesman, Turing machine, urban planning, Vickrey auction, Vilfredo Pareto, Walter Mischel, Y Combinator, zero-sum game

This is the mechanism designer’s holy grail. You do not need to strategize or recurse. Now, it seems like the Vickrey auction would cost the seller some money compared to the first-price auction, but this isn’t necessarily true. In a first-price auction, every bidder is shading their bid down to avoid overpaying; in the second-price Vickrey auction, there’s no need to—in a sense, the auction itself is optimally shading their bid for them. In fact, a game-theoretic principle called “revenue equivalence” establishes that over time, the average expected sale price in a first-price auction will converge to precisely the same as in a Vickrey auction.


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

Alan Greenspan, Albert Einstein, barriers to entry, Berlin Wall, business cycle, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, Great Leap Forward, household responsibility system, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen special economic zone , Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

The auctions were held without making sure that there was any interest from bidders, without minimum prices, and using a theoretical curiosity called a “Vickrey auction,” which led to considerable embarrassment. (The auction was named after its inventor, Nobel laureate William Vickrey, who made major early advances in applying game theory to auctions.) The Vickrey auction is a second-price sealed-bid auction. The “sealed bid” means that each bidder writes down a single bid and seals it in an envelope. When the envelopes are opened, the highest bidder wins. “Second-price” is the curious rule that the winner pays not his bid but that of the second-highest bidder. The elegant reasoning behind this auction is that no bidder ever has an incentive to shave his bid in an effort to make more profit; making a lower bid affects his chance of winning but not the price.