This paper by Ausubel outlines the virtually criminal aspects of the current IPO process by companies who go public and their interactions with the financial institutions that execute the IPOs. There are many examples of financial institutions underpricing the initial value of a company so that there is more of a spread in the first day’s trading of that company’s issued equities. This knowledge of underpricing is known a privileged few who consequently profit greatly. The financial institutions demand a cut of the profits as a result of their under-valuation.

Ausubel outlines how the entire IPO process must be overhauled and switched to an auction-based process. Although Ausubel critiques the use of the primary sealed-bid auctions we have learned about in class, he does cite alternative auctions that are appropriate for the IPO process. Ausubel mentions the “winner’s curse” in his critique of the sealed-bid auctions, in which the winner may have won as a result of possession of unfavorable information amongst opposing bidders. Ausubel suggests the use of an ascending auction in which there is constant feedback on opponents’ valuations of the equities being issued.

The first link given above is to an article written by the National Academy of Sciences detailing the different kinds of auctions that exist in today’s world. These include: First Price, Second Price, Dutch, English, etc. This is directly relevant to our study of auction theory in class, and correlates with our understanding that in a second-price auction, it is optimal to always bid one’s true value. There is also an explanation that in a first-price auction, it would be optimal to bid lower than one’s true value.

The next article continues from the first, and we see that there has been some conflict in the past with oil companies. These companies have all bid for offshore drilling rights, and the winners of each auction have always come up shorthanded. This means that they ended up bidding more for the rights than the profit from the oil they were to drill. This phenomenon is known as the winner’s curse, and is explained that: In an auction where no one knows the certain value of the auctioned item at hand, then most people who bid their true value (which is the optimal strategy) will always come up shorthanded. Even when some bidders know the actual value of the item and bid it, there will always be some who overbid them. Thus, the article claims that it would be optimal in this situation to always bid lower than one’s own value. Also, the strategy continues on to say that the more bidders there are in the auction, the lower one should bid. It is a very interesting article which coerces game theory with auction theory, and delves somewhat into the psychotics of the processes behind auctions.