Networks Blog 2
In auctions, bidders are always trying to have the best bid while profiting by the most amount of money. Bidders are usually looking for dominant strategies in order to allow them to have the highest payoff. There are risks from bidding too low or too high in second price auctions because of the way these auctions work. Each bidder would submit a sealed bid to the seller and the highest bid would end up winning and pay the second highest price. We covered this kind of game theory in lecture when searching for dominant strategies and highest payouts through second-price sealed-bid auctions. It revolved around assessing each case that the player has the option to choose, and based on those options, we can evaluate each of them to determine which one benefits the bidder the most.
In the article Policonomics, the author describes how dominant strategies always provide greater utility no matter what the other player chooses to do. He relates this to auctions when he describes why it is a dominant strategy to bid your true value in second-price sealed-bid auctions. His reasoning is that if a bidder bids their true value, they can earn whatever their value of the item was, subtracted by the second highest price of the item. In any other case, the bidder would bid over or under their value and make less profit or none at all. This is because these other strategies result in a lower payoff for the bidder. Since this is a dominant strategy, meaning it does not depend on what the other player does, we know that even if we know what the other bidders bid, it would not change the dominant strategy of bidding the true value.
https://policonomics.com/lp-game-theory2-dominant-strategy/