The Game Theory behind Art Auctions
The paper by Madhuri Kamtam discusses the practice of auctioning in the art world but in a game theory perspective. While holding auctions, art houses like Christie’s, Sotheby’s and Bonham’s are actively engaging their customers to purchase their products. In this complicated game of auctioning, a not easily seen game strategy may include increasing social status when an art is purchased, ensuring authenticity for their products, and much more. This paper mainly studies how art auctions function and shares that an ascending auction is much more likely to be won by the strongest firm when compared to a sealed-bid auction. This may also be one of the reasons why we see ascending auctions much more than other types of auctions. For auction houses, holding an ascending auction may be their dominant strategy since this further encourages the bidders to compete with others, and often times jump out of their comfort range.
An example from the book ”Strategies and Games Theory and Practice” is given where the players are the bidders in an art auction. There are 4 cases given as examples to show that the dominant strategy for most cases in an ascending auction is proved to be bidding the truth (the highest price at which you are willing to pay for the artwork). In these 4 cases, a Nash Equilibrium is reached when the difference between the true valuations was not large. This could be kept in mind when we as bidders are participating in any type of ascending auction. Using this study, we can tell that the best strategy for us as bidders would be bidding the truth.
Citation:
1.https://www.researchgate.net/publication/332653695_The_’Art_World’_of_the_Auction_Houses_The_Role_of_Professional_Experts
2. http://www.owlnet.rice.edu/~econ440/advcdGT3new.pdf