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(The Atlantic)   The lesson to learn from Black Friday: Shopping is a sport, and corporations are better at it than any of us   (theatlantic.com) divider line 1
    More: PSA, Black Friday, Dan Ariely, Williams-Sonoma, deadweight, behavioral economics, lessons, The Wall Street Journal Report, sports  
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2911 clicks; posted to Main » on 29 Nov 2013 at 9:25 AM (1 year ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



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2013-11-29 10:00:38 AM  
1 votes:

autopsybeverage: If you want to understand why it's so hard to find the best deal for an item, look no further than bids on new items on eBay. It's not hard to find items that have been bid up above MSRP. If that's an item you might have been bidding on, you're competing with idiots.


It's worse than that: if you're bidding on any item, it's very likely that you will overpay if you win, since you paid more than anybody else thought the item was worth. Economists call this the "winner's curse".

There's a few ways to avoid the "winner's curse":

1 -- if the item means more to you than to other bidders (e.g. sentimental value, or completing a set that is more valuable together than apart), you can bid the most and still gain.

2 -- if the auction is not really competitive, i.e. a flawed market (e.g. few bidders know about it). There have been frequent scandals in the antiques auction market where dealers would set up illegal rings, i.e. agreements not to bid up items against each other. Each would then get items relatively cheap that they could resell at a profit at retail.

3 -- If your information is better than anybody else's. The winner's curse occurs because real markets have incomplete information, so everybody bidding has to independently estimate the market value of the item. (In an imaginary perfect market of complete information, everybody would know the value of the item both to themselves and to the market as a whole, and nobody would overbid). In principle we assume that the average bid in such circumstances is closest to the true market value, and the winning bid is therefore too high. But if you have unique information, this doesn't apply.

For example, suppose you are a wireless carrier bidding for 4G spectrum at the beginning of the smartphone era, and you have realized something your competitors have not, that data bandwidth is going to become dramatically more valuable in a short time. You are therefore willing to bid more for spectrum, valuing it for data, than your competitors who value it only for voice. The asymmetry of information breaks the curse.
 
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