Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

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Auctions: Basic Theory and Applications

Historians of the Roman Empire often refer to the year 193 AD as the year of the five emperors.¹ Following the death (by assassination) of Emperor Commodus in 192, the famed Praetorian Guard had arranged for the appointment of Pertinax as the new Roman emperor. However, Pertinax proved to be more honest and more devoted to the ascetic ways of former emperor, Marcus Aurelius, than the Guard had expected. In particular, Pertinax did not give the Guard the generous financial reward they deemed appropriate in return for proclaiming him emperor. Dissatisfaction grew quickly. Although he escaped an initial coup, his inability to placate the Guard led to a final confrontation on March 28, 193, in which Pertinax was killed. Then followed what Roman consul and historian, Dio Cassius, called “a most disgraceful business” in which “both the City and its entire empire were auctioned off.”² The winner of this auction was Didius Julianus who ruled as emperor for an equally short time until his own assassination and decapitation prior to the ascension of Emperor Septimus Severus.

Of course, auctioning off cities and empires is a rare event. These days, however, the use of auctions is widespread. From the sale of master art works to the market for government bonds to the millions of transactions at on-line sites such as e-Bay, the auction process has become an increasingly common mechanism for awarding ownership and contracts. Indeed, it is probably the ...