6.

a. In an all-pay auction, all bidders pay the amounts that they bid for the object to be auctioned, but only the winner, that is, whoever places the highest bid, takes possession of the object. This auction process has been likened to the system of political contributions, where all lobbyists make contributions to politicians, but only the highest-contributing lobbyists can exert influence. Similarly, the all pay auction might be similar to a ticket line at a limited-seating rock concert, where each bid is reflected by the amount of time that the bidder waits in line. Other all-pay auction scenarios might involve political campaign contributions, job promotions, and R&D races. Now, consider an all-pay auction for a $1 bill. Describe how such an auction structure might realize higher revenue for the seller of the $1 bill.

b. Consider the entertainment shopping site, PennyCave.com (http://www.pennycave.

com/). This site, as do other penny auction sites, auctions electronic items such as music players and computer screens. Items are normally sold to the highest bidder at a price that is (or seems) substantially less than the value of the auctioned item. Bidders pay a fixed amount (e.g., $1) for each bid that they place. The auction clock is set for a specific length of time (e.g., 24 hours), but a bid placed in the final seconds resets the clock for another 20 seconds. Its market structure follows (as of April 25, 2011):

• The starting price on each auction is $0.00. Bid increments are $0.01.

• Each bid costs the bidder one credit. Credits are purchased from PannyCave for costs ranging from $0.67 to $1, depending on the quantity purchased.

• The price only goes up by $0.01 with each bid placed.

• If a bid is placed in the final moments, the auction clock is reset for 20 seconds.
• How does this auction structure compare to an all-pay auction structure? What is the advantage of having bid increments set at $0.01?