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someonewrongonthenet comments on Open thread, August 19-25, 2013 - Less Wrong Discussion
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Yes, that's one of the inefficiencies. The other inefficiency is that whenever the 2nd player wins, the service gets more expensive.
Because of the fact that the service gets more expensive. When there are multiple players, this might not seem like such a big deal - sure, you might pay more than the cheapest possible price, but you are still ultimately all benefiting (even if you aren't maximally benefiting). Small market inefficiencies are tolerable.
It's not so bad with 3 players who bid 20, 30, 40, since even if the 30-bidder wins, the other two players only have to pay 15 each. It's still inefficient, but it's not worse than no trade.
However, when your economy consists of two people, market inefficiency is felt more keenly. Consider the example I gave earlier once more:
I bid 30. You bid 40. So I can sell you my service for $30-$40, and we both benefit. . But wait! The coin flip makes you win the auction. So now I have to pay you $40.
My stated preference is that I would not be willing to pay more than $30 for this service. But I am forced to do so. The market inefficiency has not merely resulted in a sub-optimal outcome - it's actually worse than if I had not traded at all!
Edit: What's worse is that you can name any price. So suppose it's just us two, I bid $10 and you bid $100, and it goes to the second bidder...
I don't think that the service gets more expensive under a second price auction (which Choron uses). If you bid $10 and I bid $100, normally it would go to you for $100. In the randomized case, it might go to me for $100.
I think I agree with you about the possibility of harm in the 2 person case.
Oh yes, that's right. I think I initially misunderstood the rules of the second price - I thought it would be $10 to me or $100 to you , randomly chosen.