American Auction

Published by Mario Oettler on

The American auction is also called “war of attrition” or Shubic auction. Participants overbid each other like in an English auction. Bids are submitted openly. The crux is that each participant has to pay his last bid no matter if he won the auction or not.

For that reason, this auction type is, in some cases, forbidden. Primarily it is used for charity events. It has the property to raise the price above the actual value of the item sold.

Suppose the auctioneer wants to auction 1 EUR. There are two bidders, A and B. Bidder A bids 0.1 EUR, bidder B 0.2 because he would make a profit of 0.8 EUR. Bidder A would now bid 0.3 EUR because this promises a profit of 0.7 EUR. This process goes until 1 EUR is reached. But now, bidder A has an incentive to bid 1.10 EUR in order to minimize his loss. If he stopped bidding, he would have to pay his last bid (0.9 EUR). But with a bid of 1.10 EUR, the loss would be only 0,1 EUR. The same rationale holds for bidder A. The process could continue endlessly.