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Abstract
Consider an auction in which one potential buyer wishes to participate, but the other potential buyer would rather the bidding not start. However, once bidding starts, the reluctant firm participates (submits “bluff bids”) simply to make the eventual winner pay more. This incentive exists when the marginal effect of the winning bid is to increase a rival's profit. In 2004, AT&T Wireless placed itself for sale in an English auction. Some predicted Vodafone would make bluff bids (to make Cingular pay more. Students experience this sort of activity in the game that this article describes. Students also learn that bluff bidding affects profits of the firms involved and therefore has important implications for stock prices of participating firms.
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Notes
1. CitationVan Damme (2004) identified a mobile technology auction in which bluff bidding reportedly took place. However, he did not investigate the phenomenon analytically.
2. I explain my precise extra credit scale in a later section.
3. I do this to emphasize that V would rather not have the bidding start. Even though V's team members can figure out that C has incentive to start bidding, the V team may pass on bidding first (and sometimes has in past trials) in hopes that bidding will not start.