[boldslogan]

Trying to wrap my head around auctions in an applicable manner.

Say I am looking for a contractor to renovate my house. I don't know the actual cost or the skill of any of the contractors who are applying for the job.

Is it best to say, whoever will give me the lowest price is the person I will choose, and I will pay them the second-lowest price?

[rocqua]

Yes, presuming that all contractors are of the same quality. Technically, you might try to enforce this quality by using a contract with penalties. The idea being that acceptance of the contract ensures the job will be done properly, or you will be sufficiently compensated for an improperly done job.

The biggest issue here is that when selling a product, every potential buyer will get the same product. However, when buying a service, not every provider will necessarily provide the exact same service.

[boldslogan]

But I mean all contractors are off different skill. That’s why I want to elicit the contractor who

1 knows exactly how difficult it will be.

2 charge that cost for how difficult it will be.

3. Maybe avoid having anyone get the winners curse.

So I was wondering if this reverse auction would do that?

[rocqua]

You might avoid the winners curse if all contractors meet criteria 1 of your list. It would require all bidding contractors

A) knowing that in this auction, optimal play is bidding actual value

B) All contractors need to be confident all other contractors know this. Because one contractor that doesn't, who underbids, will win the auction but suffer the winners curse.

It should be noted that, in auction theory, even a normal first-price auction should not suffer the winners curse. Because it is still irrational to make a bid that will lead to a loss. As such, maybe auction theory isn't the place to look for a solution to this problem.

[bluedevil2k]

This is just a Reverse Vickrey Auction, not the VCG described in the article. Given that most people aren't familiar with 2nd price auctions, a good solution is to say the winner will receive $1000 less than the 2nd lowest bidder (2nd price - increment). Note, this is similar to an English auction (Ebay style), but all the bids are sealed bid.