Friday, September 5, 2014

Market Mechanic Lecture: Auctions

Unlike the other market mechanisms mentioned thus far, an auction is one of the market mechanics that board game designers properly label. But, just because game designers can properly label an auction mechanic does not mean their game needs or is better because it induces an auction.  To understand the benefits and limits of an auction mechanics in board games I will look at how auctions are used in the economy and some of the reasons auctions in board games can differ from auctions in the economy.

Auctions in the Economy

A big question in the back of my mind is why does anyone use an auction in the first place for anything?  Auctions are just one of the many ways people can negotiate with each over on the price for a good or service.  Why would I sell something by auction versus negotiating one-on-one with people?

1. Auctions Gets Goods to Highest Value User

Say I am trying to sell my My Little Pony Collection.  Without the auction I have to take time to talk to people one-on-one to solicit their bid for an item.  Talking to people individually raises the risk that I might not talk to the person who values the items the most.  I might talk to my brony neighbor, the brony down the street, but I might miss the local gas station owner who has an entire room of his house dedicated to My Little Ponies.  

Auctions that are well advertised solves this problem by making it possible for fans of My Little Ponies to find me instead of me finding them.  If someone highly values My Little Ponies, then they will be on the lookout for events, like an auction, where they can acquire more.  I no longer have to search for the people who most highly value My Little Ponies, they will reveal themselves by attending my auction.

I could advertise about selling my My Little Pony collection on a particular day and still negotiate with people one on one.  Although, I still risk not talking to the correct person who really values a particular My Little Pony the most.  Even though everyone attending my sale highly values My Little Ponies, I am not omniscient and know the particular person who values a particular pony the most. When I hold an actual auction, the person who values one of My Little Poney more than anyone else reveals themselves by outbidding the other My Little Pony fans.

2. Auctions Save Time

Theoretically, if I there is time to talk to everyone who is interested in buying a My Little Pony, I can get a similar outcome as an auction.  What I do is go to each individual and repeatedly negotiate with them to buy a My Little Pony and then sell it to the person who offers the highest price.

The problem with negotiating with everybody is my time is scarce.  I can only allocate so much time to talk to people about how much they are willing to spend to buy one of My Little Ponies.  Auctions allow me to ask everyone at once how much they value an item, so I no longer have to waste a bunch of time talking to people individually.

So those are some of the benefits of auctions, what are the drawbacks to auctions?

1. Auctions are costly to organize

To organize an auction you have to take time to publicize it; organize a venue; and find people who value the items being auctioned enough that they are willing to attend despite knowing they might not successfully bid on an item.  That means to justify holding an auction, the goods and services being sold have to be valuable enough to cover the upfront costs of hosting the event. 

2. Auctions are susceptible to the Winner’s Curse

In my post explaining The Winner’s Curse I show that if you believe in rational expectations and the item being bid upon has a known true value, then the average bid should be the actual value of the item.  But the winner of an auction is the person who makes the bid that is the highest bid above the average.  So the winner of an auction ends up paying more money for the item than what the item is worth.

The good news is that research shows that people who repeatedly engage in auctions over the same type of good escape the negative aspects of the Winner’s Curse by adjusting their bids downward.  The bad news is that this means in a board game setting, auctions will always favor experienced players of a game over new players.

Auctions in Board Games

These benefits and constraints translate into board games, but designers need to be aware of the additional constraints placed on auctions in board games space.

1. Credit Constraints

In the real world, if someone is the most valued user of an item, they can write a business plan and borrow money from a bank or investors to buy the item.  Credit/loan mechanics in board games tend to have arbitrary constraints.  I will save the details why for the next market lecture, what matters now is the realization that an auction may result in the person who values the item the most not getting it because they are liquidity constrained.

2. Board Games are usually Zero Sum Games

That means when there is board game with an auction, the designer needs to project how the price for the item alters game balance.  In particular, what happens to the resource used to buy the item.  How does that change in resource shift game balance.  And, due to credit constraints, is the auction constructed to accelerate the player in first to run away with the game, or does it extract enough resources to minimize any gain made by winning the auction.

3. Lazy Game Designers

There is merit to the adage that designers use auctions so they do not have to figure out the value of items within the game itself.  There is nothing wrong with letting players use prices and auctions to allow them to reveal value of items conditional that values of an item fluctuate due to credit constraints or different strategies/game conditions that alters the value of items from game to game or at different times within a game itself.

But if the true value of an item never fluctuates in a game, an auction in a board game just rewards seasoned players over inexperienced players.  Plus, it takes time away from the game going through the auction process.  The designer might as well set a fix price and supply for an item to save time and create a more even playing field for new players.

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