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Rationality, Irrationality and Escalating Behavior in Lowest Unique Bid Auctions

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  • Filippo Radicchi
  • Andrea Baronchelli
  • Luís A N Amaral

Abstract

Information technology has revolutionized the traditional structure of markets. The removal of geographical and time constraints has fostered the growth of online auction markets, which now include millions of economic agents worldwide and annual transaction volumes in the billions of dollars. Here, we analyze bid histories of a little studied type of online auctions – lowest unique bid auctions. Similarly to what has been reported for foraging animals searching for scarce food, we find that agents adopt Lévy flight search strategies in their exploration of “bid space”. The Lévy regime, which is characterized by a power-law decaying probability distribution of step lengths, holds over nearly three orders of magnitude. We develop a quantitative model for lowest unique bid online auctions that reveals that agents use nearly optimal bidding strategies. However, agents participating in these auctions do not optimize their financial gain. Indeed, as long as there are many auction participants, a rational profit optimizing agent would choose not to participate in these auction markets.

Suggested Citation

  • Filippo Radicchi & Andrea Baronchelli & Luís A N Amaral, 2012. "Rationality, Irrationality and Escalating Behavior in Lowest Unique Bid Auctions," PLOS ONE, Public Library of Science, vol. 7(1), pages 1-8, January.
    • Handle: RePEc:plo:pone00:0029910
    DOI: 10.1371/journal.pone.0029910
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    Cited by:

    1. Cancan Zhou & Hongguang Dong & Rui Hu & Qinghua Chen, 2015. "Smarter than Others? Conjectures in Lowest Unique Bid Auctions," PLOS ONE, Public Library of Science, vol. 10(4), pages 1-13, April.
    2. Baronchelli, Andrea & Radicchi, Filippo, 2013. "Lévy flights in human behavior and cognition," Chaos, Solitons & Fractals, Elsevier, vol. 56(C), pages 101-105.

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