A Model of Rational Competitive Bidding

Abstract

This paper presents a mathematical model of the bidding process that deals explicitly with the uncertainty of the bidders about the value of the subject of the auction. By dealing with this often ignored factor, it obtains equilibrium strategies and profits as a function of the number of bidders, the relative values they attach to the subject of the auction and their accuracy in estimating it. Models are developed for both highest-bid-wins and lowest-bid-wins auctions.