Question

“… the problem is which of two people should have an indivisible object, a “seller”(which originally has it) or a “buyer”. The efficient solution is that whoever values it more should have it, perhaps with some payment to the other.” (J. Farrell, Economics Perspectives, 1987, p. 120). Discuss all different types of auctions explaining which of these ensure that the principle in the above statement applies, why it leads to a Pareto efficient outcome and whether such a type of auction is always desirable.

Answer 1

Auctions are an event where different parties can value a good or service at its maximum deserving rate. Auctions are seen as a potentially efficient mechanism for the sale and purchase of goods. They are used for a variety of goods, but, in particular for rare expensive goods, which are hard to price. this process leads to a Pareto efficiency outcome as the value decided on the spot on the basis of the bidder's social status and ego so it will bring the Pareto curve at its efficient point. there are so many types of auction available, out of that here I am discussing major two.

1. Ascending Price Auction

This is the simplest and most common type of auction. The highest bidder wins the right to buy the good. Sometimes the seller may set a reserve price to prevent the good for being sold for less than it deserve it is also known as minimum fixed price auction.

2. Descending Price Auction ‘Dutch Auction’

In this type of auction, the price starts high and then starts to fall. The person who bid first will gets to buy the good. This type of auction is a way to extract consumer surplus and practice first-degree price discrimination. However, if the bidder has idea about other bidder's prices, then he may be able to risk bidding at a lower price.

The Ascending price auction fulfills justify the given statement because the product value only can be measure by the use of that product. so the person who quotes a high price may fell that the product is more valuable for him compared to others.