Auctions have been used for more than 2500 years to allocate a single indivisible asset. They are also used to sell multiple units of some commodities, such as rare wine or a new crop of tulip bulbs. There are many different types of auctions in use, and far more that have never been tried but could be employed if we felt that they served some purpose. The aim of this chapter is to determine which type of auction should be used in a particular situation. Accordingly, we need to determine which bidder would get the asset that is up for sale and then how much would be paid for it.

INTRODUCTION

When the government sells things at auction—treasury bills and oil-drilling rights, for instance—the appropriate criterion for determining which type of auction should be used is the maximization of general consumer welfare. Because the bidders are usually firms, we recommend the auction type that would put the asset in the hands of the firm that would use it to produce the highest level of consumer welfare. Fortunately, this is correlated with the value of the asset to a bidder: The more valuable the asset is to consumers when it is used by firm X, the more profit X anticipates from owning the asset, and thus the higher the value that X itself places on the asset. The individual firm reservation values are hidden characteristics.