Bidding Strategies

In other words, winning the auction carries bad news about a bidder's value estimate. A savvy bidder will anticipate this, and reduce their bid accordingly.Bid shading is also used in first-price auctions, where the winning bidder pays the amount of his bid. If a participant bids an amount equal to their value for the good, they would gain nothing by winning the auction, since they are indifferent between the money and the good. Bidders will optimize their expected value by accepting a lower chance of winning in return for a higher payoff if they win.In a first-price common value auction, a savvy bidder should shade for both of the above purposes.

Whenever bidders at an auction are aware of the identity of the other bidders there is a risk that they will form a “Ring” and thus manipulate the auction result. By agreeing to bid only against outsiders, never against members of the “Ring”, competition becomes weaker, which may dramatically affect the final price level. After the end of the official auction, an unofficial auction will take place among the “Ring” members. The difference in price between the two auctions will then be split among the “Ring” members.

On the opposite side, the owner of the object being auctioned may increase competition by taking part in the bidding himself (but drop out of the bidding just before the final bid). In Britain and many other countries Rings and the bidding on one's own object are illegal. See collusion.

In an English auction a dummy bid is a bid made by a dummy bidder acting in collusion with the auctioneer or vendor, designed to deceive genuine bidders into paying more. In a First price auction a dummy bid is an unfavourable bid designed so as not to become the winning bid. (The bidder does not want to win this auction, but he wants to make sure that he will be invited to the next auction).In South Australia a Dummy bid (shill, schill) is a criminal offense but a Vendor bid or a Co-owner bid below the Reservation price is permitted, if clearly declared as such by the auctioneer. These are all official legal terms in Australia, but may have other meanings elsewhere. A Co-owner is one of two or several owners (who disagree among themselves). In Sweden and many other countries there are no legal restrictions, but it will severely hurt the reputation of an auction house that knowingly permits any other bids except genuine bids. If the reserve is not reached this should be clearly declared.

There will usually be some kind of (rough) estimate as to what the object will fetch. In an ascending open auction it is considered important that there should be at least a 50 percent increase in the bids from start to finish. To accomplish this the auctioneer must start the auction by announcing a Suggested Opening Bid, SOB, that is low enough to be immediately accepted by one of the bidders. Once there is an Opening Bid there will quickly be several other higher bids submitted. Experienced auctioneers will often select an SOB that is about 45 percent of the (lowest) estimate. Thus there is a certain margin of safety to ensure that there will indeed be a lively auction with many bids submitted. Several observations indicate, that the lower the SOB, the higher the final winning bid will be. This is due to the increase in number of bidders attracted by the low SOB. When 50 bidders compete with each other the winning bid will be about twice as high as when only two bidders compete. Sometimes with English auction there will be more than 50 bidders.

A Chi-square distribution shows many low bids but few high bids. Bids "show up together"; without several low bids there will not be any high bids.