Dollar auction - Wikipedia

The dollar auction is a non-zero sum sequential game designed by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players with perfect information in the game are compelled to make an ultimately irrational decision based completely on a sequence of rational choices made throughout the game.^[1]

The dollar auction is also referred to as the Penny Auction. Its modern version was invented by Albert Liske in conjunction with Swoopo AG which resulted in the website known as Swoopo.com.

Setup

The setup involves an auctioneer who volunteers to auction-off a dollar bill with the following rule: the bill goes to the winner; however, all bidders must pay the highest amount they bid. The winner can get a dollar for mere five cents, but only if no-one else enters into the bidding war. The second-highest bidder is the biggest loser by paying the top amount he/she bid without getting anything back. The game begins with one of the players bidding 5 cents (the minimum), hoping to make a 95 cent profit. He can be outbid by another player bidding 10 cents, as a 90 cent profit is still desirable. Similarly, another bidder may bid 15 cents, making an 85 cent profit. Meanwhile, the first bidder may attempt to convert his loss of 5 cents into a gain of 80 cents by bidding 20 cents, and so on. Every player has a choice of either paying for nothing or bidding five cents more on the dollar. Any bid beyond the value of a dollar, is a loss for all bidders alike. Only the auctioneer gets to profit in the end.^[1]

Notes

^ ^a ^b Shubik: 1971. Page 109

References

Shubik, Martin (1971). "The Dollar Auction Game: A Paradox in Noncooperative Behavior and Escalation" (PDF file, direct download 274 KB). Journal of Conflict Resolution. 15 (1): 109–111. doi:10.1177/002200277101500111. {{cite journal}}: Cite has empty unknown parameters: |month= and |coauthors= (help)
Poundstone, William (1993). "The Dollar Auction". Prisoner's Dilemma: John Von Neumann, Game Theory, and the Puzzle of the Bomb. New York: Oxford University Press. ISBN 0-19-286162-X.

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Setup

See also

Notes

References