Explain the nature of the winners curse and why it occurs in

Explain the nature of the winner’s curse and why it occurs in a common-value auction. Why is the winner’s curse not a problem for private-value auctions?

Solution

Winning, sometimes comes at too high a cost, and in this case it is the winners that are the real losers. The winner’s curse describes a pattern in auction where the winner will tend to overpay, more than its intrinsic value. The winner’s curse happens because the auction winner tends to be the bidder that overestimates value.

A notable example where an auction is immune to winner’s curse is an auction where bidders have an independent private value for the winning prize. The price has an intrinsic value to each individual person rather than a common value to everyone.

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