Rationality, irrationality and escalating behavior in lowest unique bid auctions

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 Levy flight search strategies in their exploration of "bid space". The Levy 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.

36 pages, 30 figures, 5 tables

References in corpus (2)

• Power-law distributions in empirical data
• The scaling laws of human travel

Cited by in corpus (9)

• Lévy flights in human behavior and cognition
• Long-Range Navigation on Complex Networks using Lévy Random Walks
• Fractional dynamics on networks: Emergence of anomalous diffusion and Lévy flights
• Random walks in weighted networks with a perfect trap: An application of Laplacian spectra
• Evolution of optimal Lévy-flight strategies in human mental searches
• Model reproduces individual, group and collective dynamics of human contact networks
• Onset of anomalous diffusion from local motion rules
• Behavior analysis of virtual item gambling
• Interactive Levy Flight in Interest Space