Litigation as a dollar auction

That is the title of our most recent work-in-progress, available here on SSRN. Here is an extract from the first draft of our four-page paper: “Martin Shubik [pictured below] introduced the dollar auction game in a short paper published in 1971 in The Journal of Conflict Resolution. In the original version of Shubik’s game, an auctioneer auctions off a dollar bill (or other fixed prize) to the highest bidder. In addition, both the highest bidder and the second-highest bidder must pay their respective bids to the auctioneer. Scholars have discovered real-life ‘dollar auctions’ in a wide variety of settings, including mergers and acquisitions, free agency in sports, arms races and patent races, international conflict, and even romance. To this list of real-world applications of the dollar auction, we would add civil litigation. Although some commentators have remarked in passing on the possible parallels between civil litigation and the dollar auction game, in this paper we explore this potential connection in greater detail.” In our previous work, we have compared litigation to the game of poker (see “The Poker-Litigation Game“); in our dollar auction paper, by contrast, we explain the equivalence between placing a bet and making a bid in the context of civil litigation. (By the way, shout out to William Poundstone, who introduced us to the dollar auction many years ago in his book Prisoner’s Dilemma, pictured below.)

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6 Responses to Litigation as a dollar auction

  1. CHCollins says:

    Plus-one from this corner for William Poundstone (along with Douglas Hofstatder, Isaac Asimov, Lee Smolin, Benoit Mandelbrot, Richard Feynman, Martin Gardner and Julian Barbour. Oh yes, and Albert Einstein, Martin Luther King and Roberto Clemente.)

    • That is an impressive list. Sticking with Bill Poundstone for the moment, in addition to “Prisoner’s dilemma,” I can also recommend “Fortune’s formula: the untold story of the scientific betting system that beat the casinos and Wall Street” and his books “Gaming the vote” (in which he explains the advantages of a voting system known as “range voting”) and “Priceless” (in which he explains how price is not just a function of supply and demand but also of human psychology). As much as I like Malcolm Gladwell, Poundstone’s works are right up there, if not better.

  2. Craig says:

    FYI, the only “solution” to the dollar auction that I have seen (assuming the auction is open, sequential, and first-and-second-place bidders pay) is for Bidder 1’s first bid to be 99 cents, which eliminates any (rational) incentive for other bidders to enter. Then it turns into a kind of “timing game” where the winner is the first one to speak up.

    • That sounds right, but what if instead of one dollar, the auction is for $1000 dollars. Could Bidder 1 get away with a bid for $999.00, or would he have to bid all the way up to $999.99?

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