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Dominant Bidding Strategies in “Storage Wars”

“Storage Wars” is a televison show on A&E Network about auctioning abandoned storage units. Multiple units are auctioned off throughout the day. There are a few rules to the game. The first rule is that it is a cash only auction. The significance of this rule will be discussed later. The second rule is that the bidders have five minutes to look at what is inside of the storage unit, but they may not touch anything nor can they go inside of the storage unit. Finally, the style of auction is an ascending-bid auction. All of the main bidders are very good at what they do so it is a fair assumption that they have an idea of what the other bidders’ values are.

As we learned in class, the dominant strategy for an ascending-bid auction is to stay in the auction up to the moment that the price reaches your true value for the item. In this case, it would make sense for the bidders to all raise their bids up until they reach their value for the storage unit. However, this is often not what happens. In fact, the bidders usually bid above their true value. Why is this?

Going back to the rule that this is a cash only auction, it makes sense for the bidders to bid above their value. This is because each bidder has a discrete amount of cash in their pocket before the auction so with every unit they buy they have less cash to use to bid on the next unit.  Let us consider a very simple version of this game with two storage units being auctioned off (one unit is auctioned off, followed by the next unit) and two bidders.

Bidder A’s cash = $200 Bidder B’s cash = $200
Value for unit 1 = $150 Value for unit 1 = $100
Value for unit 2 = $200 Value for unit 2 = $150

In this example, Bidder B might bid over $100, say $110, if they feel that Bidder A has a higher value for the storage unit. By doing this, Bidder A will be forced to pay a higher amount of money for the unit than if B were to bid their true value. Now for the second auction of the day, Bidder A will only have $90 remaining and Bidder B will still have $150. Even though Bidder A would be happy with paying up to $200 on the second storage unit, he cannot because he only has $90 left. Because of this, Bidder B will pay a little over $90 for a unit they value at $150. This is a good deal for Bidder B because he gets a profit of a little less than $60. From this example, I claim that bidding your true value is not the best strategy if you know the other bidders’ values.

http://www.aetv.com/storage-wars/

http://www.youtube.com/watch?v=-hSXiQJViow rules are explained from 3:00 – 3:15

 

-Greg

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