Dominant Strategies Not So Dominant
Who Wouldn’t Pay a Penny for a Sports Car?
http://www.northwestern.edu/newscenter/stories/2012/03/online-auctions.html
Lowest unique bid auctions have become increasing popular in recent times. These online auctions differ from others discussed in class such as Dutch auctions and Second-price sealed bid auctions in that buyers place bids on an item and try to have the lowest unmatched bid at the time the auction ends. If the buyer is able to do this, then he or she gets the item for that low cost. This game becomes a very attractive one because buyers are under the impression that they could get a valuable item for little to no cost at all. As said nicely in the article, “Who wouldn’t pay a penny for a sports car?” But the truth behind this game is that there are fees associated with each bid placed by a buyer, and soon these fees begin to add up and the payoff of the auction decreases. In order to ensure one’s payoff is as large as possible, buyers instantly begin thinking about the best strategy to adopt to ensure success.
According to the article, a dominant strategy for this type of auction does exist: a buyer should bet in “bursts” by betting consecutive bids close to one another and then making a jump to place bids on another cluster of values. Researchers say this strategy gives you the best possible chance of winning, yet all other bidders are aware of this strategy too. This is where the article makes me question some of our discussions in class. If everyone chooses to play the game’s dominant strategy, then is this a dominant strategy at all? Referencing the definition of a dominant strategy from class, a dominant strategy is one that is a best response to every strategy of the other players, yet what happens when the other players have the same strategy as you? The article brings up this point and comes to the conclusion that when all players implement this best strategy, then there really is no more dominant strategy, and the auction simply becomes a game of chance.
-mDubs