I want to talk to you now about auctions.
And when you think of auctions, you may be picturing in your head, somebody with
a big wooden gavel, maybe auctioning off some art or a fancy sports car.
And those things absolutely happen, but
auctions are much more ubiquitous than you might think that they
are especially in e-commerce, auctions are really everywhere.
If you think about companies like eBay, that's all done via auction,
or almost all of it is done via auction.
Google, they sell advertising.
That's also done via an auction mechanism.
So both in e-commerce and also in some brick and mortar stores,
you have prices that are really, look more like auction prices,
than that single optimal price, that I was writing on the demand function before.
So they really are important, and it's important that we understand
the different types of auctions, because there really are several different types.
So we're going to do a series of videos now, and
the goal of these is to kind of uncover the origins and
the characteristics of some very key auction types.
And when I say key, I mean they're popular.
They show up in a lot of different places in a lot of different business situations.
And then, I'm going to talk to you about some of the business situations
in which these auctions are used.
But where I want to start is by you thinking about a $20 bill.
Here's the question, how much would you be willing to pay me for this $20 bill?
If I took this $20 bill and
sold it to the individual who wrote down the highest price,
and sold it to them at that price what would you do right now,
if you were faced in an auction situation?
Let's think about that situation one more time.
But I'm going to change the rules of the game just a little bit.
I'm going to give you what amounts to a better deal.
Think about the $20 bill this way.
What if I asked you, how much would you be willing to pay me for that $20 bill?
But this time, I want you to write down a number.
And I'm going to sell this $20 bill to the person who writes down the biggest number.
But I'm not going to make you pay what you write down.
I'm going to make you pay the second highest bidder's bid.
So does everyone understand that?
The high bid wins but you don't pay what you write down.
You get to pay the second highest bidder's bid.
What would you do in that situation?