SMU SOE Seminar (Aug 10, 2017): Multilateral Deescalation in the Dollar Auction

We characterize the subgame perfect equilibriums of the dollar auction in its original form, without the constructs that the literature has added to avoid bid escalation. Contrary to Shubik’s (1971) conjecture, no equilibrium can generate higher expected revenues than the value of the prize. There is a continuum of equilibriums supported by subgames where competition between only two bidders escalates to complete dissipation of their surplus. These equilibriums are Pareto dominated, in a dynamic sense, by equilibriums that always give rise to trilateral rivalry, with the lowest bidder leapfrogging the top runners, and all three retaining some surplus. There are only finitely many such trilateral-rivalry equilibriums, each corresponding to the lowest bidder’s farthest lag from the current price before he quits the catchup efforts. Exactly one of such equilibrium-feasible farthest lag is undominated dynamically. 

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