Elite Warrior

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Dollar Auction

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It was proposed by economist economist Martin Shubik. It illustrates a paradox brought about by traditional rational choice theory in which players with perfect information in the game are compelled to make an ultimately irrational decision based completely on a sequence of rational choices made throughout the game.
Dollar auction is an all pay auction having two player. The auction is for a dollar bill. The
game begins with one of the players bidding 1 cent, hoping to make a 99 cent profit. The second player will quickly bid 2cents, as a 98 cent profit is still desirable. Again,first bidder bids 3 cents,converting his loss of 1 cent into a gain of 97 cents. In this way, a series of bids is maintained. However, a problem becomes visible the moment bidding reaches 99 cents. Supposing that the other player had bid 98 cents, he now has the choice of losing the 98 cents or bidding a dollar even, which would make his  profit zero. After that, the first player has a choice of either losing 99 cents or bidding $1.01, and only losing one cent. After this point the two players continue to bid the value up well beyond the dollar, and neither stands to profit.The game actually has no equilibrium, as two rational players in this game could theoretically lose all of their money to the auctioneer. Both players stand to lose money, but the winning bidder loses about 99 cents less than the losing bidder.
To end the bidding war a bidder can bid 99 cents more than the previous bid, leaving no bid that offers a potentially higher profit (or smaller loss). (For example, Bidder 1 bids $x, Bidder 2 bids $x + $0.99. If Bidder 1 were to bid $x + $0.99 + $0.01, he would be bidding to pay $x + $0.99 + $0.01 for a prize of $1, or a total loss of $x– the same as if he had not increased his previous bid.) As a special case of this, if the first bidder immediately bids $0.99, he will not be outbid by the other bidder, who has no potential to make a profit. The first bidder will earn $0.01 in profit and the second bidder will pay nothing and win nothing.


Written by elitewarrior

March 29, 2009 at 10:56 pm

The Winner’s Curse

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This phenomenon is known as Winner’s Curse. Let us take an example and then we will talk on it.

A teacher comes in a room with coin filled in a glass jar.The  teacher gives option to the student to guess for the total amount of money, the guy guessing largest amount of money will be getting the jar for that price. Almost more than 60% of the student will be bidding for nearest value of the sum in jar adhering to wisdom of crowd and some will bid for quite lesser than the actual sum and some will go for more than the actual sum. The guy winning the bid has paid more than the item auctioned values. The winner always gets the feeling that he overpaid.

First of all, let’s see what common value auction means. Common value auction is the type of auction where the item has got a fixed value for all participant for example a 8-GB USB drive. Its market value is fixed and costs equal for all. So, when in auction most of the people will be bidding near the market value but the guy winning the bid must be bidding higher than other fellows i.e. higher than its market price. So, after getting the product he gets a felling that he could have bought it in lesser price in market.So, it becomes a losing situation.

If the auction is not common value auction then there is different situation. Lets take example for bidding of bat-mask and bat-belt. I am a bat man fan so I could want to buy it for $150 but for one of my friend who doesn’t like batman at all it could have a value of less than $10. So , in this case, the winner is not necessarily loser. One of the way to avoid winner’s curse is to bid closets to market price.

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Written by elitewarrior

March 15, 2009 at 11:12 pm

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Slumlog Millionaire and The Almighty Buck

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Yesterday, Talking with one of my friend, Satyam Nigam, I asked him

“Did you like Slumdog Millionare ?”

“It was so-so” he said.

“Do you think it has any chance of winning in oscar ? ”

“preety good chance ”

“Why so? ”

“See, I give you an analogy. India is an emerging market. During early 90’s there was less fashion consciousness in India and less people were interested in fashion products. The strategy of global fashion market leaders remained to exploit the potential market in India, From 1994 to 2000, 6 of the Indian girls were Miss World/Universe. You can see the fashion market in India now.”

“So you want to say if Slumdog Millionare wins the title, It will help global film production companies to penetrate Indian Market”

“Or it can be made to win. It’s all about the Almighty Buck brother”

I kept wondering “Is it so?”

Written by elitewarrior

January 25, 2009 at 6:08 pm