{now with new and improved formatting}
My econ class is a little hit and miss. Some weeks I walk out of class thoroughly confused on the subject matter, while other times I’m really excited. The exciting times normally can be attributed to conversations and lectures on game theory and ways to think about competing against other firms. Our lecture today was on auctions. English, Dutch, and closed bid auctions were all discussed with a few ‘games’ played during the lecture. Some of my classmates, like normal, rolled their eyes at the idea of a game – ‘what’s the point?’, ‘this is silly’, etc.
I’ve never been this way and, in fact, really enjoy games, break-out sessions and other creative things during a lecture. It’s more interactive and, to me, fun. What isn’t fun is hearing people bitch and complain about something they could easily avoid – don’t come to class or pick up your books and leave. It’s a simple choice but one they never seem to take.
Hmm, I seem to have digressed …The various games were enjoyable but one really made an impact. The last lecture section included having us guess the value of coins in a jar and then how much we would bid for the jar.Marco, our lecturer, opened up bidding – £3, £4 so on and so forth until we had a few people bidding at £19. I’d dropped out early because my estimate was around £6.50. Once the bidding concluded Marco asked about our bids and how our estimates, if plotted in a graph, would have a normal distribution around the average of £7. In fact, the amount of money in the jar was actually £6.96.
The normal distribution of the class can be attributed to each of us having just a little information on the correct answer and in this situation, the winner of the auction was, and would almost always be, people who have wildly over estimated the amount. In other words, they would be on the tail of the normal distribution. To me, this was a huge revelation. The winner of an auction is the highest bidder – always. So, if everyone is estimating the future value of a good then the company that estimates the highest value, or the long tail of an average, will always outbid the more conservative firm. However, using the logic that the average bid is closer to the actual price then that company/person always over pays.
Can this be why the 3G companies in the UK who won the bids for new licenses are having so much trouble? Or, why a first mover into a market often fails because their estimates, the very reason they’ve been able to enter the market, is too aggressive and the shear fact they are able to enter is the main reason they’ll fail?
There has to be a way to both win a bid and become successful but history shows a lot of firms have made that error. Win the bid, and then collapse from the cost and ‘over aggressive’ estimations. The balance between always loosing and winning a pyrrhic victory appears to be very slim. How does one proceed then?