Question

Releasing more information in a common-value auction is: 1) good for the bidders because it reduces the risk that they face 2) good for the auctioneer because it attracts more bidders 3) good for the bidders because they are less likely to bid more on the item than it’s worth 4) both 1 and 2

Please, clarify your answer.

Answer 1

Releasing more information in a common-value auction is - 4) both 1 and 2 i.e. 1) good for the bidders because it reduces the risk that they face 2) good for the auctioneer because it attracts more bidders.

In common value auctions the value of the item for sale is identical amongst bidders, but bidders have different information about the item's value.

One important phenomenon occurring in common value auctions is the ''winner's curse''. Bidders have only estimates of the value of the good. If, on average, bidders are estimating correctly, the highest bid will tend to have been placed by someone who overestimated the good's value. This is an example of adverse selection, similar to the classic "lemons" example of Akerlof. Rational bidders will anticipate the adverse selection, so that even though their information will still turn out to have been overly optimistic when they win, they do not pay too much on average.

Sometimes the term winner's curse is used differently, to refer to cases in which naive bidders ignore the adverse selection and bid sufficiently more than a fully rational bidder would that they actually pay more than the good is worth.