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    Auctions: Theory and Practice

     
    How auctions work, and why every economist should understand auction theory.
    2/28/2005

    What's a fair price? What's the right price? Truly, it all depends on who's buying and selling. In auctions, where the seller doesn't set the price, is a fairer price paid? Maybe.

    That's the opinion of Paul Klemperer, author of Auctions: Theory and Practice, who explains the various types of auctions and the factors necessary to make an auction work. He has a good understanding of the topic, having coordinated the British government's 3G mobile license auction that raised over $34 billion in 2000. It was widely regarded at the time as the most money ever raised in an auction. (Klemperer devotes parts of the book to a case study of the 3G auction.) However, not every auction is successful and the author, a professor of economics at Oxford University, goes into some detail on the abuses of the auction model and how it can fail miserably.

    Klemperer clearly describes the variety of ways auctions occur, be they in the form of a "descending bid" auction, such as bids for construction contracts, or "ascending bid" auctions, such as eBay. Due to the pervasiveness of the auction concept, he makes a compelling argument that "every economist should learn some auction theory."

    In sum, this book provides a succinct overview of auction theory with the general reader in mind. It's a useful subject to know about, given such high profile activities as the Dutch auction used to set the price for Google's recent IPO as well as the way in which the Internet lends itself to the use of auctions as a fluid and effective way to carry out transactions. Auctions are only likely to become more prevalent in the years to come as the standard method for buying and selling.—Ann Cullen

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