Chapter 18

Knowing How to Win at Auctions

In This Chapter

arrow Distinguishing the different types

arrow Seeing how bidders behave at auctions

arrow Dealing with the problem of the winner’s curse

People often associate auctions with the sale of antiques and artworks, often sold in specialist auctions run by famous auction houses such as Christie’s or Sotheby’s. For example, in June 2006 Christie’s in New York auctioned Vincent van Gogh’s painting Portrait of Dr. Gachet for $82 million (which, allowing for inflation over the last ten years, amounts to $152 million in today’s prices — not bad for a man who sold only one painting during his lifetime). Or they think of auction sites on the Internet, like eBay, where you can bid on just about anything imaginable.

But all sorts of other things can be auctioned, too, and they don’t need to be physical objects. The U.S. Federal Communications Commission auctions off valuable parts of the radio spectrum to mobile phone networks. Since 1994, it has conducted more than 85 auctions and raised roughly $60 billion for the U.S. Treasury.

In an auction, the seller tries to maximize the value of the assets that it wants to sell. More potential buyers exist than assets, ...

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