Lowest Unique Bid Auctions

TL;DR

This paper analyzes Lowest Unique Bid Auctions, highlighting how real bidder behavior deviates from rational models, and demonstrates that sellers profit while some bidders win frequently, proposing strategies for these bidders.

Contribution

It provides an empirical analysis of bidder behavior in Lowest Unique Bid Auctions and explains why actual outcomes differ from theoretical rational predictions.

Findings

Sellers profit from these auctions despite rationality assumptions.

Some bidders win repeatedly, indicating non-rational strategies.

Observed bidding behavior diverges significantly from theoretical models.

Abstract

We consider a class of auctions (Lowest Unique Bid Auctions) that have achieved a considerable success on the Internet. Bids are made in cents (of euro) and every bidder can bid as many numbers as she wants. The lowest unique bid wins the auction. Every bid has a fixed cost, and once a participant makes a bid, she gets to know whether her bid was unique and whether it was the lowest unique. Information is updated in real time, but every bidder sees only what's relevant to the bids she made. We show that the observed behavior in these auctions differs considerably from what theory would prescribe if all bidders were fully rational. We show that the seller makes money, which would not be the case with rational bidders, and some bidders win the auctions quite often. We describe a possible strategy for these bidders.