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ECON30290 - Auction Theory
Unit 2 - The Revenue Equivalence Theorem
Omer Edhan
Omer Edhan 1 / 29 1 / 29
Section 2.1: Revenue Equivalence
for 1st and 2nd Price Auctions
Omer Edhan 2 / 29 2 / 29
Section 2.1A: Payment and
Revenue in 1st Price Auction
Omer Edhan 3 / 29 3 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I
=
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I
=
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I
=
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I
=
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I
=
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I =
n
∫ v
v
mI (x)
f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I =
n
∫ v
v
mI (x)f (x)dx
Omer Edhan 4 / 29 4 / 29
1st Price - Payment and Revenue
Buyer i with valuation x expected payment:
mI (x) = Pr(Win)× Bid
= G (x)× E [Yi |Yi ≤ x ]
Seller’s expected revenue:
e I = n
∫ v
v
mI (x)f (x)dx
Omer Edhan 4 / 29 4 / 29
Section 2.1B: Payment and
Revenue in 2nd Price Auction
Omer Edhan 5 / 29 5 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x)
= Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ]
= mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x)
= Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ]
= mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x)
= Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ]
= mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x) = Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ]
= mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x) = Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ]
= mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x) = Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ] = mI (x)
Seller’s expected revenue:
e II
= n
∫ v
v
mII (x)f (x)dx = n
∫ v
v
mI (x)f (x)dx = e I
.
Omer Edhan 6 / 29 6 / 29
2nd Price - Payments and Revenue
Under a symmetric equilibrium β(x) = x (bid the valuation).
Bidder 1 with valuation x has expected payment:
mII (x) = Pr(Win)× E [2nd bid |x is highest]
= G (x)× E [Yi |Yi < x ] = mI (x)