Dollar Auction game

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A strategic game (1) devised by the US economist Martin Shubik (born 1926) and published in the Journal of Conflict Resolution in 1971, designed to model strategic escalation and entrapment. A dollar bill (or other currency note) is auctioned to the highest bidder in a group. The highest bidder gets the dollar bill, and the second-highest bidder receives nothing, but both bidders must pay the auctioneer amounts corresponding to their last bids. Suppose the bidding stops at 40c and the previous (second-highest) bid was 35c, then the 40c bidder gets the dollar, and the auctioneer collects 40c from that bidder and 35c from the second-highest bidder (who receives nothing in return). The first moment of truth occurs after two bids have been made—say 10c and 20c. If no other bids are made, then the first bidder will simply lose 10c, but putting in a further bid for 30c opens up the possibility of winning 70c provided that the auction ends there. The most disturbing moment of truth occurs if the bidding reaches the one-dollar mark, and the second-highest bidder must decide whether to bid more than a dollar for the one-dollar payoff in the hope of minimizing what is by then an inevitable loss: for example, a bid of 105c will result in a loss of only 5 cents if the bidding stops there, but the other bidder may bid even higher for the same reason. Once the bidding passes the one-dollar threshold, the bidders are motivated to minimize losses rather than to maximize gains. When played with real bidders, the game is usually highly profitable for the auctioneer, and controlled experiments have shown that bidding almost invariably exceeds the value of the prize and sometimes goes as high as 20 dollars, causing much distress to the participants. See also Concorde fallacy.

Subjects: Psychology.

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