Application of auction theory in the context of the Indian Premier Essay

Application of auction theory in the context of the Indian Premier League - Essay Example This theory is highly essential from a theoretical, empirical and economic perspective. This paper aims to discuss the main principles of the auction theory along with the considerable issues and their solutions associated to the phenomenon of auction market. For this paper, we shall consider an example of the Indian Premier League (IPL) to relate it with the relevant theoretical principles of the auction theory. Auction Theory: Auction theory is a branch of economics which takes a number of concepts into analysis that includes the risks, behaviors, challenges and activities of bidders within the auction processes. The process of auction has been used from earliest traces of economic activities. Economists have contributed in the auction theory including Vickrey (1961), Griesmer, Levitan and Shubik (1967) etc. Extension of Auction theory is referred to as theorem of revenue equivalence (see appendix 1.1). As per the contributions of different economists, there are four standard types of auctions. These bids are commonly known as the English Bid, the descending bid which also known as the Dutch bid, first sealed bid and a second seal bid. Each one is unique and possesses interesting factors, which grasp attention of the interested buyers (Besanko and Braeutigam 2000). Now we shall analyze each type of bid separately supported with relevant examples. English Bid: According to Gul and Stacchetti (1999), English bid is a type of bid that slowly goes higher. Sometimes this type of bidding appears as most simplistic, however at the same time it can create complexities for both buyers and sellers. English auction begins with a bid which is placed by an auctioneer who places the starting bid which is a given price of the product being sold. The bids are then placed one by one in an increasing order. English bid is different from other bids such as sealed bids because it is open to all bidders with no policy of hiding (Gul and Stacchetti 1999). The one who makes the highest bit wins the product. In this type of bid prices increase comparatively with small margins and the buyers intend to win the item at low price than its original value at which the product bidding started i.e. starting bid. For example, there is a likelihood of quick sale of a car during an auction as the standing bid will be lowest, which will be affordable for a sing le buyer, who will finally take the commodity home (Auctus Development, Inc, 2004). It should also be noted that the English auction can be win by the standing bidder which can only be displaced by a competitively higher bid than the standing bid (Jaiswal 2010). Furthermore, Klemperer (1997) noted that English bids or ascending bids are usually used for selling household items such as cars, appliances, furnisher and sometimes properties as well. This type of bid facilitates sellers to make great sum of money and an amazing opportunity for the buyers to win the bid (Klemperer 1997). A reserve or minimum price is charged for house hold commodities in English auction (Auctus Development, Inc 2004). Dutch Bid: According to Besanko and Braeutigam (2000), the Dutch system is entirely