How to participate in a low bid auction

Above is a short article I found interesting about low bid auctions. A low bid auction is actually an auction where the lowest bid wins… with one exception: the bid must be unique. So in theory you can bid one cent on an item, but if someone else bids one cent also, then both of those bids are nullified. Only the lowest unique bid wins. Take the example found in the article. Consider the bids:

$00.01, $00.03, $00.01, $00.02, $0.07, $0.90, $0.02, $0.03

$0.07 and $0.90 are the only unique bids. However, $0.07 would be the winning bid and price because it is the lowest of the unique bids.

I found the concept of low bid auctions to be very interesting because it seemed to be very different from the type of auctions that we discussed in class, where highest bidders have won the auctions. Can we however justify low bid auctions with game theory? How can these type of auctions possibly benefit the seller? What is the dominant strategy and can that strategy raise the selling price?

The caveat to the seemingly too-good-to-be-true bidding system is that your low bid must be unique. So while most will take initial strategy of trying to get the lowest price, they end up working against each other as the lowest of bids will all be nullified due to non-uniqueness. Bidders then have to bid higher and higher in hopes to bid a unique price. This is how the selling price is raised and eventually reach an equilibrium where no one else is willing to bid any higher. The equilibrium is not found at the lowest bids, but rather is found at higher bids where the bids are more unique. The strategy is thus to bid just a little bit higher than the rest of bidders, which actually amounts to the same as 2nd price sealed bid auctions.

So, low bid auctions aren’t in fact too-good-to-be-true. The results should end up being the same as a 2nd price sealed bid auction. However, the novelty of the system is attracting and  forces participation & active bidding (bidders want to make sure that no low price is left unique). Such novelty and participation are probably the main reason why low bid auctions have found some success.