Auction Theory and Auction Practice Discrepancy - a Paper Review

Today I presented a paper review in LARGE group. The paper is from Management Science (1994) entitled “Modeling Competitive Bidding: a Critical Essay” written by Michel Rothkopf (RIP) and Ron Harstad. These 2 big economists in auction area write an essay which explains that there is big discrepancy between the existing (though its 1994 paper, I think it’s still relevant to the current research context) auction theory and the real practice, so that the developed theory is having limited application to the real live condition. My main interpretation of the whole paper is bundled by the figure shown below:


From this paper, we learn that the theories which try to model the competitive bidding behavior in auctions (both decision theory and game theoretical model) are mostly written in a single and isolated auction context. Moreover the assumptions which frame the theories (e.g. single isolated auctions, fixed number of bidders, symmetric Nash equilibrium, risk neutral bidders, etc) also limit the real world applicability. They suggest the researchers to adjust and enrich the elegant but simplified existing models so that the bidding model could be utilized in the real world situations.

There were a was discussion on how should we develop an analytic model which will fit to our research interest, which is the Dutch Flower Auction. Our research context is unique, since we are dealing with multi unit, multi bidders, multi suppliers, multi attributes, and highly interdependent auctions. We agreed that this paper would be considered as our main reference since it brings a lot of insights on how to make a realistic an applicable model, not just an elegant model which is good for theoretical sake but could not be applied in reality.

This writing also available in LARGE blog.