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Jump bidding
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Jump bidding
In auction theory, jump bidding is the practice of increasing the current price in an English auction, substantially more than the minimal allowed amount.
At first glance, jump bidding seems irrational. Apparently, in an English auction, it is a dominant strategy for each buyer whose price is above the displayed price, to always bid the minimal allowed increment (e.g. one cent) above the displayed price. By bidding higher, the bidder gives up the opportunity to win the item at a lower price.
However, in practice buyers increase the displayed price much more than the minimal allowed increment. Buyers may even sometimes offer an increase on their own high bid, seemingly irrationally.
Several explanations have been suggested to this behavior.
When bidding is costly, or when time is costly, jump-bidding allows the bidders to reduce their total costs and get to the outcome faster.
Consider two veteran bidders, that compete with each other many times in English auctions. Each time, the higher-value bidder wins the item and pays the lower-value to the seller. Then, one day they decide to cooperate: they agree that from now on, the higher-value bidder will bid 1 and the lower-value bidder will bid 0. This way, the higher-value bidder will always win the item for free. Such cooperation could be very beneficial to both bidders in the long run. The problem is, it cannot be enforced, because both bidders have an incentive to say that their value is higher than it really is.
Here jump-bidding comes into play. It works like a signaling game. By jump-bidding, the jumper signals that he has a high value, and so the other bidder should quit immediately if his value is lower.
Two bidders, Xenia and Yakov, participate in an auction for a single item. This is a common value auction with the following parameters, where A B and C are independent uniform random variables on the interval (0,36):
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Jump bidding
In auction theory, jump bidding is the practice of increasing the current price in an English auction, substantially more than the minimal allowed amount.
At first glance, jump bidding seems irrational. Apparently, in an English auction, it is a dominant strategy for each buyer whose price is above the displayed price, to always bid the minimal allowed increment (e.g. one cent) above the displayed price. By bidding higher, the bidder gives up the opportunity to win the item at a lower price.
However, in practice buyers increase the displayed price much more than the minimal allowed increment. Buyers may even sometimes offer an increase on their own high bid, seemingly irrationally.
Several explanations have been suggested to this behavior.
When bidding is costly, or when time is costly, jump-bidding allows the bidders to reduce their total costs and get to the outcome faster.
Consider two veteran bidders, that compete with each other many times in English auctions. Each time, the higher-value bidder wins the item and pays the lower-value to the seller. Then, one day they decide to cooperate: they agree that from now on, the higher-value bidder will bid 1 and the lower-value bidder will bid 0. This way, the higher-value bidder will always win the item for free. Such cooperation could be very beneficial to both bidders in the long run. The problem is, it cannot be enforced, because both bidders have an incentive to say that their value is higher than it really is.
Here jump-bidding comes into play. It works like a signaling game. By jump-bidding, the jumper signals that he has a high value, and so the other bidder should quit immediately if his value is lower.
Two bidders, Xenia and Yakov, participate in an auction for a single item. This is a common value auction with the following parameters, where A B and C are independent uniform random variables on the interval (0,36):