Psychological Strategies – Auctions
It is clear that the dominant strategy for second price auctions is to bid truthfully (directly bidding whatever one’s value might be), rather than bidding over or under the value. The proof is pretty simple — if one decides to lowball it and bid less than how much that person values the item, other players may end up bidding more than he/she did, but less than how much he/she values the item. The person ends up losing the item, and also losing in the sense that he/she could have put a bid down at his/her value and won the item, and still payed the second (cheaper price).
Similarly, it is also a bad strategy to bid higher than one’s value. If one bids higher than how much he/she values the item, and the second highest bid is less than that amount but more than how much that same person values the item, he/she will end up winning the item and paying the second highest price, which is still paying more than its value. Undeniably, it is a better strategy to bid at one’s “true” value for second price auctions. While this strategy is certainly correct and the dominant one for bidding in a second price auction, it is interesting to explore psychological strategies that might be useful for winning ascending auctions for more expensive items at stake, such as real estate.
One interesting strategy mentioned in the link below describes the “Knockout bid” which essentially means that the bidder puts down an aggressively high bid to scare the other players into quitting. Suppose the item up for auction is a vintage automobile and the current bid is at $75,000. Further, suppose that the rules require bidders to increment their bids by a minimum of $1,000 up to $90,000. Up to this point, bidding has been fairly steady with multiple $1,000 increases, some $2,000 increases, and even a few $3,000 increases. If one’s true value for the car lies at $100,000, and he/she is fairly certain that other players are willing to pay that amount or even more, putting down a Knockout bid for $100,000 (increasing the current bid by $25,000) might do the trick and win the auction. The idea behind this strategy is to send the message to other players that one has plenty of money and is willing to continue these dramatic increases if necessary. Additionally, others tend to round numbers when picking their “true value”. So it is reasonably unlikely that another player would choose a value like $102,000 and stop there.
There are certainly caveats to this argument. For one, it is mostly only applicable to higher priced items. A $25,000 jump is more dramatic then a $25 jump. In addition, one may run the risk of paying more than what he/she could have if he/she had slowly increased the bid. In other words, suppose the second highest bidder only valued the car at $80,000. Instead of instantly bidding $100,000, it would have been in the winner’s favor to be patient and slowly increase the bid until $80,000 was reached.
Link: https://realas.com/blog/3-auction-bidding-strategies/