Non-aggressive bidding behavior and the "winner's curse"

Abstract

Previous authors have noted a curious result that arises in 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.