ABSTRACT
The US government sells natural resources by auction and may soon take bids on radio airwaves and pollution rights. And in the largest auctions in recorded human history, the US Treasury each year sells roughly $2.5 trillion worth of debt. The Treasury's current procedure is what is known as a multiple-price, sealed-bid auction. This chapter analyzes bidder behavior in auctions. It applies this framework to two models in which only one unit of an object is being sold at auction: a simple model called the independent private-values model and an extension called the correlated-values model. The chapter describes how economists generally think about bidder behavior under any type of auction procedure. The framework which was used for this is game theory. This is a way to analyze how rational decisions are made by competitors in uncertain conditions. In auctions, of course, the competitors are primarily the bidders.
