In Chapter 8, we considered a first extended application of game-theoretic ideas in our analysis of traffic flow through a network. Here we consider a second major application – the behavior of buyers and sellers in an auction.

An auction is a kind of economic activity that has been brought into many people's everyday lives by the Internet, through sites such as eBay. But auctions also have a long history that spans many different domains. For example, the U.S. government uses auctions to sell Treasury bills and timber and oil leases; Christie's and Sotheby's use them to sell art; and Morrell & Company and the Chicago Wine Company use them to sell wine.

Auctions will also play an important and recurring role in this book, since the simplified form of buyer–seller interaction they embody is closely related to more complex forms of economic interaction as well. In particular, in the next part of the book, when we discuss markets in which multiple buyers and sellers are connected by an underlying network structure, we'll use ideas initially developed in this chapter for understanding simpler auction formats. Similarly, in Chapter 15, we'll study a more complex kind of auction in the context of a Web search application, analyzing the ways in which search companies like Google, Yahoo!, and Microsoft use an auction format to sell advertising rights for keywords.

Types of Auctions

In this chapter we focus on different simple types of auctions and how they promote different kinds of behavior among bidders. We consider the case of a seller auctioning one item to a set of buyers.