Dollar auction

The dollar auction, also commonly called escalation auction, has been developed by Martin Shubik game that can act through its gameplay participants irrational, even though they actually have all the necessary information to behave rationally. Thus, the applicability is questioned " rational choice theory " in relation to human behavior through this game. The content of this game is the auction of a U.S. dollar.

Gameplay

An auctioneer has two or more bidders to a dollars at auction. The first bidder is a bid for the dollar, such as 1 cent, from. The next bidder may be more than the previous offer or nothing. The auction ends when no bidder has the commandment of his predecessor increased more. The bidder with the highest bid gets the dollar. This winner and the participant with the second highest bid in each pay their due amount to the auctioneer.

Expiration

In general, the auction is carried out as follows:

Participants outbid by a few cents, to secure the dollar. The bids rise until it reaches the one-dollar limit, for a winning bid of 99 cents still brings a profit.

It is interesting then following the course. The auction stops usually not when it reaches the one-dollar bid. The bids rise on average to 3.40 dollars. This for bidders financially detrimental escalation can be explained with a rational for the moment decision:

Suppose there are two bidders A and B and the current - not first - bid of A is 99 cents. B, with the second highest bid of 98 cents, for example, faced with the choice not to submit a further offer and certainly losing 98 cents or a dollar and offer the chance to get yourself to win the auction and thus the dollar. In general, B offers a dollar. If A does not offer now on, he would be committed to paying their last bid of 99 cents. If he offers but $ 1.01 and B were from no other offer would get A dollar and lose a cent. When choosing between a sure loss of 99 cents and an uncertain, smaller loss, most participants choose the second option and thus offer $ 1.01. Now B is certain to lose a dollar or more to offer to get the prospect to a smaller loss before the election.

As the game progresses, the loss for both players is increasing. At a certain stage occurs the gain or the loss is in the background and it is then necessary to win the auction and not to the payment itself. Opponents begin to accuse each other irrational action. The game shows the character of an escalation. You do not want to be the fool who loses.

Counter-strategies

One way to prevent an escalation and the bidder to bring a profit, is cooperation. This assumes that an agreement before or during the auction is and will occur. This agreement might look like this: A user provides a penny and proposes to the rest of the players intend to share the profit, they should do not bid. In general, this only works for a small number of bidders.

Another possibility is that the first bidder at the very beginning, offering 99 cents. For a subsequent bidder is " no bid " then a weakly dominant strategy. The first bidder then has a penny as profit. However, if someone offers yet further, one comes to the corresponding already given case. In the two- bidder auction this trap is bypassed when the first commandment exactly amounts to one dollar. The profit is then indeed zero, but " no bid " is then for any other bidder a strictly dominant strategy.

Another option is to not participate in the game, but they does so can not win anything.