By Maarten Janssen
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Extra resources for Auctioning Public Assets: Analysis and Alternatives
Hence, all units sell at the same price. In practice, different variants may be distinguished: bidders may, or may not, know the demand as expressed by their competitors; they may, or may not, be prevented from increasing their demand again after they have previously reduced it, etc. In the descending, or Dutch, auction, the price starts at a relatively high level and is then gradually lowered. At each price p, bidders will be informed about the supply s( p) that is still left and they have to indicate when the price has reached a level at which they are willing to buy one or more units.
In many practical situations, however, some bidders might be known in advance to be stronger than others. We can describe such a situation formally by assuming that some bidders’ valuations are drawn from a distribution which typically yields higher values. As a simple example, consider the extreme case in which there are only two bidders, and bidder 1’s value is drawn from a uniform distribution between 0 and 1, while bidder 2’s value is drawn from a uniform distribution between 2 and 3. Thus, it is known in advance that bidder 2 can make much better use of the object than bidder 1.
In these situations, part of the compensation is paid before any service is delivered and the government has to ensure that the service is indeed delivered and is of the quality that has been promised and agreed upon. Elaborate contracts and extensive monitoring may be needed in this case of ‘moral hazard’; Williamson (1976) gives a good overview of the difﬁculties and the trade-offs involved. Another issue to be considered before an auction is who should be allowed to participate. For bids in an auction to be credible, bidders must be ﬁnancially respectable, and most government auctions include an appropriate screening of bidders.