Second-price auctions are brilliant for one-shot transactions, and for cases where nobody is likely to use the knowledge of your true price against you. But imagine if it wasn’t among friends, but strangers, and if it were repeated every month. Now strategy again matters.
In repeated cases, knowledge about previous bids can give participants good reason to lie about their preferences. In the simplest case, knowing that a higher willingness-to-pay exists (but did not obtain because the second-best bid was quite low) can motivate someone to put in a higher-but-expected-to-lose bid just to drive up the price.
Depends what you’re comparing Second Price Auction to, though, right?
I agree with the point that there is probably a longterm new equilibrium if you start doing it all the time, but then I thought for 10 minutes about it and I’m not sure what outcome you’d be worried about.
In the case of roommates negotiating the value of each room: this happens all the time for every shared apartment.
If landlords got to see the outcome of those negotiations, it might cause them to raise rents more, but landlords already get a general sense of when they are underselling their property and raise rents when they can.
If roommates continuously rented together and wanted to extract value from each other, without a second price auction, roommates are still often incentivized to exaggerate preferences. The SPA just streamlines the negotiation and helps ensure minimal envy between room allocations. (It might get less “magically good seeming” in equilibrium, but it still seems better than many alternatives)
That particular problem appears to apply only to auctions where a single party is both placing a bid and also receiving (at least some of) the price that the winner pays?
(Note: I believe I understand how second-price auctions work in simple cases, but I’m not clear exactly how that’s being applied to the rent-splitting scenario in the OP, so you may be assuming some context that I haven’t picked up.)
How so?
In repeated cases, knowledge about previous bids can give participants good reason to lie about their preferences. In the simplest case, knowing that a higher willingness-to-pay exists (but did not obtain because the second-best bid was quite low) can motivate someone to put in a higher-but-expected-to-lose bid just to drive up the price.
Depends what you’re comparing Second Price Auction to, though, right?
I agree with the point that there is probably a longterm new equilibrium if you start doing it all the time, but then I thought for 10 minutes about it and I’m not sure what outcome you’d be worried about.
In the case of roommates negotiating the value of each room: this happens all the time for every shared apartment.
If landlords got to see the outcome of those negotiations, it might cause them to raise rents more, but landlords already get a general sense of when they are underselling their property and raise rents when they can.
If roommates continuously rented together and wanted to extract value from each other, without a second price auction, roommates are still often incentivized to exaggerate preferences. The SPA just streamlines the negotiation and helps ensure minimal envy between room allocations. (It might get less “magically good seeming” in equilibrium, but it still seems better than many alternatives)
That particular problem appears to apply only to auctions where a single party is both placing a bid and also receiving (at least some of) the price that the winner pays?
(Note: I believe I understand how second-price auctions work in simple cases, but I’m not clear exactly how that’s being applied to the rent-splitting scenario in the OP, so you may be assuming some context that I haven’t picked up.)