#teachactions

Auction Process

In Storage Wars, interested buyers get five minutes to peer inside a storage unit that is up for sale. However, they cannot go inside and they cannot move or touch any of the unit’s contents. After the five minutes is up, an auctioneer begins an English (open outcry, first-price) auction. Bidders harass and outbid each other for a good whose value is largely speculative. Eventually, one party, the high bidder, is willing to outpay all the rest for the storage unit. Only then is s/he allowed inside the unit to begin assessing whether or not s/he can recoup the cost of the storage unit through sale of the goods inside or even earn a profit.

The Winner’s Curse

Your students might already know about auction mechanisms like the English auction or the difference between first-price and second-price but it’s always good to have a refresher. More importantly, you can use the Storage War example to teach Affiliated or Common Value Auctions (most real life auctions fall under these categories). Unlike private value auctions where bidders have different values for the good that are not related to each other, bidders’ values for the contents of the storage unit are likely positively correlated (Affiliated Value) or the same (Common Value). The five-minute inspection from outside gives every bidder a signal, that is, a clue about how much the unit might be worth, but no one knows for sure. Some bidder might think they saw a Porsche while other bidders think it’s a stack of cardboard boxes. The true value is probably somewhere in between. This accounts for the Winner’s Curse phenomenon where the “winner” ends up overpaying for the unit. The winning bidder is usually the one with the highest estimate of the unit’s value, but this “winner” neglects to take into account that others think the unit is not worth as much, often with good reason. This video shows what happens when a buyer thinks they bought something of value, only to find out otherwise, a classic case of the Winner’s Curse. 

Student Bonus

Your students might be shocked, just shocked, that this reality TV show may not be so real. Ask them how they might change their bidding strategy, now knowing that the storage units might be rigged?