Every week, GDT holds either a Trading Event or a shorter duration GDT Pulse Auction to facilitate the trading of large quantities of dairy products among international buyers and sellers. The prices determined in these Trading Events are regularly used by industry stakeholders and financial market participants to inform their business decisions. But why are they run the way they are, and how have these auctions evolved? In the first article of our series on Understanding GDT’s Auctions, our Chief Economist, Philipp Heller, will guide you through the history and development of game theory and auctions.
Formal Auction Theory
Despite the early enthusiasm for the use of game theory, it wasn’t until the 1980s that it started being applied to understand how people behave in auctions and how sellers can design auctions to get the best results. Notably, in an article published in 1981, Roger Myerson showed that a simple auction with a reserve price is an optimal method for selling a single good (under some conditions). Despite this progress in understanding single unit auctions, applying the theory directly to sales of large numbers of goods proved more challenging.
Practical Auction Design
Based on theoretical guidance on the use of auctions developed by economists, governments recognised that they possessed valuable assets, notably the radio spectrum, for which they needed a mechanism to ensure both the best use of the assets as well as an adequate payment for the private use of these public resources. Initial “beauty contests” for the allocation of radio spectrum proved highly inefficient as they allocated valuable resources at what turned out to be prices far below their true economic value to interested parties. Problems with prior processes, including the sequential running of second-price auctions, led to the creation of more sophisticated formats, like the simultaneous multi-round ascending auction, as well as clock auctions. These feature the simultaneous auctioning of related products in a single auction, allowing participants to switch their demand within an auction to optimize their purchases. Since the 1990s, auctions for various commodities and licenses including radio spectrum and electricity, have become common worldwide, bringing in billions of dollars in revenue.
Since 2008, GDT has been using a similar procedure, technically called an ascending price clock auction, for the sale of dairy commodities. Stay tuned for our next post on how a uniform price ascending clock auction works.
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