Dollar Auction

AAA

DEFINITION of 'Dollar Auction'

The basic dollar auction is based on the auction of a $1 bill between two individuals. A dollar auction is a non-zero-sum game, which, like the prisoner's dilemma, reveals that rational behavior can often lead to an undesirable consequence. The winner of the auction receives the bill while the other participant must pay the price of his last bid.

INVESTOPEDIA EXPLAINS 'Dollar Auction'

After both participants have put in their initial bids, logically it doe not make sense for them to stop bidding up the price. For example, if participant A bids 90 cents, which is followed by a $1 bid from participant B, participant A can either bid $1.01 and lose 1 cent or drop out of the auction and lose 90 cents. Rationally, the bid should be placed. Participant B is now left in a similar situation where he can bid $1.02 or drop out, resulting in respective losses of 2 cents or $1. The bidding process would theoretically continue to perpetuity as both players stay committed to the losing cause.







RELATED TERMS
  1. Sealed-Bid Auction

    A type of auction process in which all bidders simultaneously ...
  2. Tit For Tat

    A game-theory mechanism which is subject to a payoff matrix similar ...
  3. Iterated Prisoner's Dilemma

    A normal prisoner's dilemma played repeatedly by the same participants. ...
  4. Prisoner's Dilemma

    A paradox in decision analysis in which two individuals acting ...
  5. Reverse Survivorship Bias

    The tendency for low performers to remain in the game, while ...
  6. Game Theory

    A model of optimality taking into consideration not only benefits ...
Related Articles
  1. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  2. Mutual Funds & ETFs

    Is Biased Investing Holding You Back?

    Risk aversion seems to come to us naturally, preventing us from stepping into unfamiliar territory. But feeling comfortable isn't always the best thing for your portfolio.
  3. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  4. Personal Finance

    Why Are Tesla Cars So Expensive?

    What makes Tesla cars so expensive? Short supply and pricey parts is a good place to start.
  5. Economics

    What is M1?

    M1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
  6. Trading Strategies

    Know How To Manage Gaps On Your Trading Strategy

    Gaps generate profitable strategies right after they print, as well as during retracements that test those levels, often months or years later.
  7. Economics

    Higher Oil Prices On the Horizon? Maybe Not.

    Despite a decision by some oil companies to reduce the overall supply of oil, a sustained ascent in oil prices might not be on the immediate horizon.
  8. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?
  9. Investing Basics

    The Easy Way To Measure Bitcoin's Fair Market Value: A Do-It-Yourself Guide

    How do you determine the fair market value of a currency that has appreciated faster than the shares of even the hottest technology stocks?
  10. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center