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NON‐AGGRESSIVE BIDDING BEHAVIOR AND THE “WINNER'S CURSE”
Author(s) -
SMITH JAMES L.
Publication year - 1981
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1981.tb00323.x
Subject(s) - winner's curse , bidding , curse , common value auction , economics , microeconomics , competition (biology) , context (archaeology) , phenomenon , mathematical economics , ecology , paleontology , physics , quantum mechanics , sociology , anthropology , biology
Previous authors have noted a curious result that arises within the context of sealed‐bid auctions: in certain situations it is in the bidder's interest to respond non‐aggressively to increased competition. We consider a decision‐theoretic formulation of the bidder's problem, and derive necessary conditions for the choice of a non‐aggressive bidding strategy. The resulting conditions relate closely to a phenomenon that has been described rather loosely by bidding practitioners as the “winner's curse.’ In the course of this paper we develop a specific definition of the winner's curse, and demonstrate how it affects the firm's competitive behavior.